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Annual report
and accounts 2013
Bringing service to life
Look for page references for additional content.
Links are illustrated with the following marker:
Cross reference to a page
with more information
Divisional reviews
P24-41
Meet the Board
P62-64
Serco Group plc | Annual report and accounts 2013
Contents
Strategic Report
02 I Chairman’s statement
05 I What we do
06 I How we performed in 2013
08 I Our business
09 I Our business model
10 I Our strategy
12 I Principal risks and uncertainties
16 I Key performance indicators
18 I Chief Executive’s statement
24 I Divisional reviews
42 I Finance review
52 I Corporate responsibility
58 I Greenhouse gas emissions
Directors’ Report
60 I Corporate Governance Report
60 I Chairman’s letter
Leadership
62 I Meet the Board
65 I Our governance framework
67 I How the Board operates
Effectiveness
68 I The work of the Board
68 I Board effectiveness
Accountability
70 I Financial reporting process
70 I Managing business risks and internal control
71 I Our approach to risk within the Serco Management System
73 I Going concern
Engaging with shareholders
74 I How we engage with shareholders
75 I Audit Committee Report
80 I Nomination Committee Report
81 I Corporate Responsibility Committee
82 I Remuneration Report
106 I Directors’ Report
108 I Directors’ responsibilities statement
Financial statements
109 I Independent Auditor’s Report
113 I Consolidated Income Statement
114 I Consolidated Statement of Comprehensive Income
115 I Consolidated Statement of Changes in Equity
116 I Consolidated Balance Sheet
117 I Consolidated Cash Flow Statement
118 I Notes to the Consolidated Financial Statements
170 I Company Balance Sheet
171 I Notes to the Company Financial Statements
Additional information
174 I Supplementary information
175 I Directors, Secretary and Advisors
176 I Shareholder information
177 I Financial calendar
01
Chairman’s statement
The events of last year are well
documented: in July the Secretary
of State for Justice announced that
an independent audit of the billing
arrangements of the Electronic
Monitoring contracts Serco
operates had highlighted potential
overbilling and in September,
materials were provided to the
Serious Fraud Office on this
matter. In August, the Ministry
of Justice (MoJ) and Serco made
announcements regarding the
referral to the City of London
Police of the misreporting of data
on the Prisoner Escort & Custody
Services contract. The issues
that were identified on these
two contracts should never
have happened and we have
apologised unreservedly for them.
May I take this opportunity on
behalf of the Board to make an
equally fulsome apology to our
shareholders. We are doing
everything in our power to make
sure that such issues cannot
reoccur anywhere in our business
around the world. Our objective
continues to be the delivery of
excellent public services with
openness and transparency,
and I believe the actions we have
taken and are taking will support
this now more than ever.
Twelve months ago I wrote: “In all parts of
Serco, when I visit our contracts I meet people
who have the same commitment to service,
to making a difference through helping those
with whom they work, whilst at the same time
delivering against our promises.” I still believe
that at the core of Serco is a combination of
a strong ethos of public service with a real
entrepreneurial drive to succeed and deliver
against commitments, inside and outside the
company. The independent reviews that we
have performed of our culture and systems
confirmed a high commitment to client service
with no evidence of a corrupt culture, and key
procedures and controls that were adequate but
could be improved. However the reviews also
demonstrated the need for attitudinal change,
a change I, our Board, and Ed Casey, our
Acting Group Chief Executive, are committed
to implementing. The reviews showed that
culturally there was a drive to succeed and
deliver that could lead our people at times to
make decisions that prioritised commercial
objectives over ethical behaviour. Also, whilst
our systems and controls formed a solid basis
for a management framework, there was a lot
more we could do to ensure that if there are
issues, they are identified early, acted upon,
and lessons learned.
I recognise that such inappropriate actions
and decisions undermine the confidence
people have in us. Our company relies upon
the confidence of our customers and the
confidence of the public, and anything that
damages that, damages us. But it is not just
our company: the whole industry relies on
such confidence. If it is damaged, we lose
the opportunity to show the difference
outsourcing can make, and we lose the ability
to show how the private sector and competition
can contribute to excellent, efficient, low-cost
public services. This is why your Board has
taken these matters so seriously.
I was very pleased to reach a settlement with
the UK Government prior to the end of the
financial year, in respect of issues arising
on the Electronic Monitoring contract. The
separate audits of our other MoJ contracts and
the Cabinet Office’s wider review across our
other major UK Central Government contracts
also concluded by the end of the year, with
no further material issues raised. During the
fourth quarter of last year, we developed and
set in train a comprehensive programme of
corporate renewal. At its heart this programme
aims – through leadership, training, guidance,
and appropriate performance management
– to change the balance of drivers within our
business, such that the commitment to do what
is right and to deal with our customers fairly and
transparently always transcends that sustained
drive to outperform. This will be supported by
the right management structures and controls
and best-in-class lines of assurance, to ensure
that through early identification of risks and
issues and their swift resolution, we never again
compromise on our values and ethics. I was
very pleased that at the end of January, the
Cabinet Office published a positive assessment
of our programme and, as a consequence,
Serco can now be considered on an equal basis
to other suppliers for the award of new contracts.
It is hard for those outside the company to
appreciate how disruptive were the events of
last year to the normal conduct of our business.
Not only was our pipeline of contracts with the
UK Government impacted by the suspension
of awardability last summer, but the associated
reputational damage also adversely affected
our ability to win contracts with the private
sector. We have made significant management
changes at the most senior level, with new
people, sometimes in an acting capacity,
needing to assimilate their responsibilities
and determine how to take forward their
parts of the business. Absolutely correctly,
management has focused on the development
and implementation of our programme of
corporate renewal, diverting focus from where
they would otherwise be concentrating their
efforts to make our business more efficient,
extend existing lines and explore new ones.
The inevitable consequence has been a material
loss of momentum, particularly in the UK,
which translates itself into lower organic revenue
growth and profitability than we would otherwise
have aimed to achieve in 2014. In addition, 2014
will be impacted heavily by a major change of
government policy affecting one of our largest
contracts, that for the Australian Department of
Immigration and Border Protection, whilst there
is also a greater known impact of attrition from
lost contracts such as Electronic Monitoring.
Our experience at Forth Valley and other UK hospitals
helped us to win the contract at Fiona Stanley hospital
in Perth, Western Australia.
02
Serco Group plc | Annual report and accounts 2013Strategic Report It is essential that we take the steps now that are
necessary to put Serco onto a sound basis for
future growth, even if to do that means a degree
of reversal of past growth. Key to that is strong,
effective leadership and I am very pleased to be
able to announce that Rupert Soames OBE has
accepted the Board’s invitation to take the role
of Group Chief Executive. He will start with us on
1 June. He has an outstanding track record as
chief executive of a FTSE 100 company, having
created very significant value for shareholders
during his long tenure at Aggreko plc. I would
like to take this opportunity to express my great
appreciation on behalf of the Board of the work
of Ed Casey, in taking the helm in the most
difficult of circumstances and providing great
leadership to get the company back on track.
I would also repeat my thanks to Chris Hyman
for his enormous contribution to Serco over
19 years. As CEO since 2002, he took Serco
from a predominantly UK business with
a turnover of £1.3bn to the £5bn international
services business it is today.
In thinking about the potential of the business
for the future, Serco has a unique combination
of capabilities with international reach. No other
company has the breadth across both frontline
and middle and back office services. No
other company can apply the experience and
track-record that we have in one of our markets
in the UK, Europe, the Americas, the Middle
East, Asia Pacific, or Australia, to support the
winning of new contracts in another geography.
We would not have won the Fiona Stanley
hospital in Perth, Western Australia, if we had
not achieved what we have at Forth Valley and
elsewhere in hospitals in the UK. We would not
have won Mt Eden prison in New Zealand had
we not achieved what we have in prisons in the
UK and Australia. We would not have won the
Virginia Department of Transportation contract
without our traffic management experience
in the UK and Hong Kong.
One should not lose sight of what the business
did achieve in 2013, despite the issues in our
relationship with UK Central Government. We
were awarded contracts to a value of £3.7bn
and achieved organic revenue growth of 6%,
albeit with a somewhat lower operating margin
Alastair Lyons CBE
Chairman
03
Strategic Report responsibility for the ethical and governance
oversight of the Group, as well as taking over
from the main Board detailed consideration of
the company’s health and safety, environmental
and risk policies and management. Rachel
is a past Deputy Governor of the Bank of
England, and has been Permanent Secretary
at both the Department of Work and Pensions
and the Department for Transport. She is
currently Chairman of the Conduct & Values
Committee of HSBC. Tamara Ingram is currently
an executive vice president of WPP and
last year rotated after nine years from being
a non-executive director of the Sage Group.
She will join both the Remuneration and
Corporate Responsibility Committees.
In conclusion I would like to say thank you
on behalf of the Board to all those of our
management and staff who have worked so
hard over the last 12 months, both to deliver
our promises on our contracts and to address
the challenges that have faced us. It is very
hard maintaining one’s energy and commitment
working for a company that is in the news for
the worst of reasons; the determined response
of our people over this period stands testament
to the strong foundations of Serco and gives
confidence in our ability to realise our full
potential. This confidence supports the Board’s
decision to maintain the final dividend payment,
resulting in a total dividend for the year of
10.55p, an increase of 4.5%.
Alastair Lyons CBE
Chairman
Chairman’s statement
Continued
that left Adjusted pre-tax profits at £254m,
6% lower than 2012. Particularly gratifying was
the progress achieved in the Americas, where
in 2012 we had experienced the toughest
trading conditions, with new contract awards
being constrained by the inability to agree a
US Federal Budget. Despite this uncertainty
continuing during 2013, we won new contracts
with the United States Department of Health
and Human Services’ Centers for Medicare
& Medicaid Services to provide processing
support for new health benefit exchanges, worth
potentially US$1.25bn, and with the Virginia
Department of Transportation to manage
traffic in the state of Virginia, worth US$355m.
In Canada, we were successful in the rebid
of our contract to provide driver examination
services in the state of Ontario for a further
ten years, worth C$500m.
Furthermore, we celebrated Serco’s 25 years
as a listed company, with our staff undertaking
phenomenal challenges to raise more than
£400,000 for charities all around the world.
I am delighted to welcome three new non-
executive directors to our Board. They add
to our diversity of thought and experience,
as we consider how best to take the business
forward. Mike Clasper has a strong reputation
as both executive and non-executive. Latterly
in his executive career he was CEO of BAA,
whilst as a non-executive he was Chairman
of HMRC and is senior independent director
at ITV and Chairman of Coats. He will join the
Audit, Corporate Responsibility and Nomination
Committees. Rachel Lomax will join the Audit
Committee and will become the Chair of
the newly formed Corporate Responsibility
Committee. This committee will have
04
We were awarded the contract at Mt Eden prison
in New Zealand because of our achievements at
the prisons we run in the UK and Australia.
Serco Group plc | Annual report and accounts 2013Strategic Report What we do
We deliver services that make a positive difference to people’s lives
Our customers are local, state and national governments and major private companies.
They face an increasingly complex and competitive world. People and communities
have rapidly changing needs and expect the services they use to make a positive
and tangible difference to their lives.
The organisations that serve them – our customers – have limited resources. Many are
having to do more with less. Delivering service, and doing it well, is more difficult than
ever. To overcome these challenges, our customers want a partner who can improve
the quality and efficiency of their services and help them keep their promises to their
own customers and citizens.
All of this means that service has never been more important or more challenging.
It needs a specialist approach.
We specialise in service delivery
Serco has specialised in service delivery for more than 50 years. The combined
capabilities we offer, across frontline, middle and back office services, are unique.
Our customers know what outcome or service they want to deliver and we find new and
more effective ways to achieve it for them. Together, we make a difference to the lives
of millions of people around the world.
Our people are always looking for ways to improve our service delivery. We transfer
our skills, insights and ideas from one sector or region to another, so we can meet new
challenges for customers. Drawing on this broad experience is at the heart of what
makes us different. It ensures we deliver well today and use what we learn to anticipate
our customers’ needs tomorrow. It transforms good service into great.
Great service can look different from sector to sector and from country to country,
but the values and capabilities it needs are broadly the same. Our service specialism
means our customers can focus their time and people on what they do best, confident
that our experience, innovation and scale will deliver the business and customer
benefits they want.
Our capabilities allow us to work around the world on behalf of defence, transport,
justice, health, and state and local government customers in the public sector, and to
provide customer contact and business process activities for private sector customers
in finance, retail, travel and telecommunications.
We have a strong service ethos
Our people have a strong service ethos and a real desire to deliver the promises we
make to our customers.
We value working with our customers in a collaborative, flexible and imaginative way.
We understand the principles and passions that motivate public sector managers
and we seek to share their ethos and standards of conduct. We encourage social
responsibility and try to treat people in the way we would wish to be treated. Our most
powerful tool in improving performance is to instil a more stimulating culture, where
people feel they can personally make a difference. We have honed this tool into four
Governing Principles: we foster an entrepreneurial culture; we enable our people to
excel; we deliver our promises; and we build trust and respect.
Following the challenges of 2013, we launched an independent review of our culture
and ethics, and were reassured to find a workforce that believes strongly in Serco’s
commitment to service excellence. Our employees spoke openly and candidly, with the
clear intent of providing constructive feedback to senior leadership as to how to restore
Serco’s good name. The events of 2013 were painful and embarrassing for our people,
who care deeply about Serco and the customers it serves. There was no evidence that
Serco has a corrupt culture or that the Company knowingly encourages improper or
unethical behaviour. What was identified was an environment in which Serco employees
could make inappropriate decisions to achieve commercial success, and it is this
environment that we are committed to change as a fundamental part of our
corporate renewal.
05
Strategic Report How we performed in 2013
A challenging 2013 and near-term outlook;
markets remain attractive.
●●● Earnings per share (basic) of 19.51p,
●●● As previously disclosed, a mid-single digit
Revenue growth of 5.6% for the Group;
growth of 5.9% on an organic basis
●●● UK & Europe: organic growth of 3%, driven
by first half growth from new contracts won
in the previous year
●●● Americas: held steady, with new health and
transport contract wins despite a challenging
US federal market
●●● AMEAA: organic growth of 18%, supported
by increased volume of work in immigration
services
a decline of 58.0% at constant currency
●●● Free cash flow declined to £84.8m, after BPO
working capital investment and other adverse
timing effects
Increased total dividend for the year
and robust financing position
●●● Proposed final dividend held at 7.45p; total
dividend for the year of 10.55p, up 4.5%;
ongoing transition to higher payout ratio
●●● Group recourse net debt of £725m; sufficient
●●● Global Services: organic growth of 5%, with
financing headroom maintained
strong first half from previous awards partially
offset by a weaker second half of the year
Reduced profit and cash generation
●●● Adjusted operating margin from ongoing
activities declined to 5.6%, driven in particular
by higher BPO bid investment and fewer
contract awards in the year
●●● Adjusted earnings per share (basic) of 39.53p,
a decline of 2.1% at constant currency
●●● Net exceptional charge of £90.5m, reflecting
principally the Electronic Monitoring settlement
and one-off costs, together with an estimated
£21.0m of other indirect costs in relation to
the UK Government reviews
●●● Operating profit of £143.8m, a decline
of 44.6% at constant currency
Notes and definitions:
Further progress on contract awards
and strategic positioning
●●● £3.7bn of contract awards; order book
of £17.1bn as at 31 December 2013
●●● New US contract awards successfully
broadened the Americas portfolio
●●● Non-core disposals reflected ongoing
assessment of operations against their
fit to Group strategy
Challenging near-term outlook
●●● 2014 faces above-average contract attrition,
reduced volume of work in Australian
immigration services and lower expected
growth from new contracts awarded
organic revenue decline and a 50-100 basis
points reduction in Adjusted operating margin
is anticipated
●●● Of 2014 revenue, order book visibility of 77%;
rebid/extension revenue still to secure of 8%
Securing Serco’s position in large
and growing markets
●●● Equal bidding basis for current UK Central
Government work restored following
corporate renewal positive assessment;
settlement reached with UK Ministry of Justice
(MoJ); conclusion of UK Government audits
and reviews
●●● Comprehensive programme of corporate
renewal, to ensure consistency of appropriate
behaviours and improve operations across
the Group
●●● Ongoing demand for efficient, high-quality and
innovative service provision from public and
private sector customers around the world
●●● Pipeline of new bid decisions over
next two years valued at approximately
£12bn or aggregate annual revenue of
approximately £1.4bn
●●● As announced recently, Rupert Soames
OBE appointed as Group Chief Executive
with effect from 1 June 2014; currently
Group Chief Executive of Aggreko plc,
the FTSE 100 support services company
2012 is restated for changes to accounting standards IAS 19 Revised (Employee Benefits) and IFRS 11 (Joint Arrangements).
Adjusted measures include Serco’s proportional share of joint ventures. Adjusted operating profit and Adjusted profit before tax are before amortisation of intangibles
arising on acquisitions, transaction-related costs and exceptional items, as shown on the face of the Group’s consolidated income statement and the accompanying
notes. They are also before management’s estimate of indirect costs incurred and allocation of expenses in relation to the UK Government reviews. The Adjusted
earnings per share measure also takes account of the tax effect of these adjusting items. Adjusted net debt includes Serco’s proportional share of joint venture net cash.
Reconciliations to GAAP measures, together with descriptions of each adjusting item, are included in the Finance Review on pages 42 to 51 and the income statement
is presented on page 113.
Change at constant currency has been calculated by translating non-Sterling revenue and earnings for 2013 into Sterling at the average exchange rates for 2012.
Ongoing activities measures exclude the financial results of subsidiaries and operations disposed of in 2013 (being the UK occupational health business and the
UK transport maintenance and technology business) and in 2012 (being nuclear consulting services, defence-related German operations, education software and
UK data hosting operations).
Organic revenue growth is the change at constant currency in Adjusted revenue from ongoing activities (thereby excluding disposals) and also excludes incremental
revenue from acquisitions completed in the current or prior financial year.
Free cash flow is from subsidiaries and dividends received from joint ventures, and is reconciled to recourse net debt in Section 6 of the Finance Review, and to the
movement in cash and cash equivalents, including the share of joint venture cash movements, in Section 3 of the Finance Review.
The order book reflects the estimated value of future revenue based on all existing signed contracts, including Serco’s proportional share of joint ventures. It excludes
contracts at the preferred bidder stage and excludes the award of new Indefinite Delivery, Indefinite Quantity (IDIQ) contract vehicles and Multiple Award Contracts (MACs)
where Serco is one of a number of companies able to bid for specific task orders issued under the IDIQ or MAC. The value of any task order is recognised within the order
book when subsequently won.
The total opportunity pipeline is the estimated value of all future potential new, expansion, rebid and extension opportunities that are clearly defined and identifiable,
including the estimate of any proportional share of future joint venture arrangements. The pipeline of new bid decisions over the next two years is the aggregate value
of potential new contracts that are anticipated to be bid in the near term, where annual revenue for each is estimated to be in excess of £10m and where the estimated
total contract value of each is capped at £1bn.
06
Serco Group plc | Annual report and accounts 2013Strategic Report Adjusted Revenue*
Revenue
£5,143.9m
£4,288.1m
2012: £4,913.0m
2012: £4,060.1m
Adjusted operating profit*
£292.0m
2012: £314.1m
+4.7%
+5.6%
(7.0%)
Operating profit
Adjusted profit before tax*
Profit before tax
£143.8m
2012: £272.2m
£254.4m
2012: £271.6m
£106.6m
2012: £281.1m
(47.1%)
(6.3%)
(62.1%)
Adjusted earnings per share*
Dividend per share
Free cash flow
39.53p
2012: 41.55p
10.55p
2012: 10.10p
£84.8m
2012: £181.2m
(4.9%)
+4.5%
(£96.4m)
*Adjusted measures include Serco’s proportional share of joint ventures and are before amortisation of intangibles arising on acquisition, transaction related costs,
a pre-tax net exceptional charge of £90.5m (2012: net exceptional profit of £51.7m) and management’s estimate of indirect costs incurred and allocation of expenses
in relation to the UK Government reviews of £21.0m. Ongoing activities exclude the financial results of disposals. Notes and definitions are provided on page 6,
reconciliations and descriptions of costs are included in the Finance Review on pages 42 to 51 and the income statement is presented on page 113.
07
Strategic Report Our business
In 2013 we delivered our services through four
divisions, as described below. More information
on our divisions and their performance in the
year can be found in the Divisional Reviews
on pages 24 to 41.
In October 2013, we announced our intention to separate
the UK & Europe division into two, with one business
focused on our UK Central Government customer
and the other on our wider UK public sector activities.
This new structure came into effect on 1 January 2014.
UK & Europe
Americas
AMEAA
2013 Adjusted revenue from
ongoing activities
£2,514m
+3%
2012: £2,436m
The UK & Europe division includes our
frontline services in: Transport and Local
Direct Services; Defence & Science;
Home Affairs (encompassing justice-related
operations, immigration and border security,
and welfare); and Health.
2013 Adjusted revenue from
ongoing activities
£765m
+1%
2012: £753m
Our Americas division provides professional,
technology and management services
focused primarily on the US Federal
Government, including every branch of the
military, a broad range of civilian agencies
and the national intelligence community.
We also provide services to the Canadian
Government, and selected US state and
municipal governments.
2013 Adjusted revenue from
ongoing activities
£1,050m
+19%
2012: £883m
AMEAA consists of our operations in
Australasia, the Middle East, Asia and Africa.
We provide a range of frontline services
including transport, justice, immigration,
health, defence and other direct services,
such as facilities management.
Global Services
2013 Adjusted revenue from
ongoing activities
£772m
+10%
2012: £702m
Our Global Services division provides
business process outsourcing (BPO)
services to both the private and public
sectors, bringing together Serco’s middle
and back office skills and capabilities across
customer contact, transaction and financial
processing, and related consulting and
technology services.
08
Serco Group plc | Annual report and accounts 2013Strategic Report Our business model
Our business model is built on a set of key strengths,
which enable us to compete effectively and create
value for our shareholders and other stakeholders.
These competitive advantages derive from our focus
on delivering the best service for our customers,
the unique breadth of our business, our structure
and our people.
Our strategy (see pages 10 to 11) builds on and
reinforces these strengths.
Serco is a people-based business, so we
seek to employ excellent people with a strong
service ethos. Their insight, experience of service
delivery and desire to make a difference for
our customers underpin everything we do.
To enable our people to deliver their
best, we continue to invest in engaging
and developing them, along with the
systems and leadership framework
that support them.
Delivering excellent service for our
customers and the public is at the heart
of our offering. It enables us to build long-term
relationships, which allow us to grow our contracts
and retain them at rebid. It also helps us to win new
work and enter new markets.
We use our 50 years of experience to bring fresh
perspectives to customers’ problems, for example by
creating new contracting or partnership models. Our
track record of innovation and delivery also makes us
an attractive partner for other organisations, so we
can combine our skills to produce unique and
compelling customer offerings, through joint
ventures or through our supply chain.
Customer
focus
Committed
people
Value
creation
Broad
business
Local
responsibility,
global
scale
We devolve day-to-day
decision making to the contract level,
empowering our people to deliver excellent
service. This also helps makes our business
scalable, as we take on more contracts. At the
same time, we use our scale to drive efficiency and
support our service delivery, through shared services
and common processes.
The Serco Management System (SMS) is designed to
ensure local decisions are in Serco’s best interests, as
well as the customer’s. Following the issues in 2013
in two of our UK Government contracts, we have
reviewed the SMS as part of our corporate renewal
programme, strengthening and expanding
it to ensure it provides a robust control
framework into the future.
Serco has unique breadth. No other
company can match our range of services,
which combine frontline delivery with middle
and back office processing. We have real depth
of expertise in the sectors we work in and
the capabilities we offer. With operations
in over 30 countries, we also have
significant international reach.
Our broad business allows us to target the best
opportunities, in whichever market or country
they occur. This reduces our reliance on any one
market and allows us to transfer skills honed
in one market to others around the world,
opening up new opportunities.
The competitive environment
Competition is necessary for our markets to
operate, as it encourages customers to put
services out to tender, provides a benchmark
to ensure they are getting best value and
drives innovation.
Our business breadth means we have many
competitors for both public and private sector
contracts. These competitors are primarily
companies but for government contracts they
can include public sector and voluntary bodies.
As we enter new markets, we meet competitors
who specialise in those areas. While we see
effective competitors in every market, no
organisation competes with us in all of them
and only a few operate in more than one.
The overall level of competition is rising in our
markets and customers are increasingly seeing
assured service delivery as a prerequisite, rather
than as a differentiator. They want providers
that bring confidence, experience and insight,
and who can partner with them to deliver
something different, including anticipating their
changing needs and working with them to drive
innovation.
Our business model makes us a strong
competitor in our markets and allows us to
target opportunities where we can differentiate
ourselves from other providers, for example
through innovation, the depth of our expertise
and the breadth of our capabilities.
09
Strategic Report Our strategy
Setting our strategic direction
Although Serco faces its own challenges and
there are some uncertainties in both developed
and emerging economies, our markets are
growing and we see that continuing. This
growth is driven by economic and demographic
fundamentals, which have strengthened over
the last few years. Citizens are demanding more
and better services within constrained public
sector budgets. There is a desire for new public
services in countries where the size and wealth
of the population is growing. Demographic
shifts continue to underpin demand, with more
and more pressure being put on physical and
social infrastructure, especially healthcare,
social services, transport and immigration.
Despite the specific challenges Serco faced in
2013, our strategic approach remains centred
on organic growth, while also emphasising the
factors that will support that growth – service
quality, efficiency and people development.
Where it is valuable to add capabilities that
complement our existing service offering, or
we want to establish a presence in new markets
that offer opportunities for our existing service
lines, we will consider acquisitions to take our
strategy forward.
Our Group strategy
Our strategy is focused on three key pillars:
building a balanced portfolio, driving improved
service and margin, and enhancing our people,
systems and brand.
10
Strategy
Description
Key achievements in 2013
Building
a balanced
portfolio
Driving
improved
service
and margin
Enhancing
our people,
systems
and brand
Our strategy aims to build a balanced portfolio across developed and emerging
We delivered Adjusted revenue growth of 4.7%.
markets, frontline and BPO services, and public and private sectors.
This reduces our exposure to market fluctuations, enables us to select the best
Americas revenues steady, despite a further year of shrinkage in the
opportunities wherever they arise, and allows us to transfer expertise from one
US Federal outsourcing market. New contracts supporting US healthcare
We saw strong organic growth in our AMEAA division and held our
market to another.
To support our organic growth, we consider acquisitions and strategic
partnerships, which add to the depth of capabilities we can take to our
customers, or enable us to enter new markets for existing service lines.
eligibility and state transportation services have successfully broadened
our portfolio in this region.
Growth was also achieved in the UK and in our Global Services division.
Reviews such as that covering UK clinical health have led to decisions
to exit early from certain contracts.
Our proactive portfolio management also involves ongoing assessment of
our contracts and businesses for strategic fit, expected performance and risk-
In 2013, we divested some operations that had become non-core,
adjusted returns. This results in our exit from markets no longer core
including UK transport maintenance and operational health services.
to the Group’s future development.
Underpinning our strategy is our ability to consistently deliver efficient and
In 2013, we experienced significant issues with two contracts for the
high-quality services across the world. As Serco grows, we increasingly look
UK Ministry of Justice (MoJ). Audits of all our other MoJ contracts and
for opportunities to transfer our capabilities across geographies, so that more
reviews of all our major UK Central Government contracts concluded
of our capabilities are available to more of our customers.
Growth allows us to drive economies of scale, providing the opportunity
to support our portfolio with shared services, processes and platforms.
We therefore continue to develop and share global best practices and aim
to maximise the efficiency of our operations.
These also help bind teams and businesses across sectors and countries.
contracts such as Shop Direct Group and Fiona Stanley Hospital, as well
to our customers’ satisfaction. Our corporate renewal programme will
also support further service improvement alongside changing attitudes.
2013 was an important year for transitioning operations on major
as starting new, large operations such as those for the US Department of
Health and Human Services’ Centers for Medicare & Medicaid Services
and Virginia Department of Transportation.
Our margin declined in 2013. The principal drivers of margin reduction
included: increased cost investment in contract bidding and new market
development in Global Services; reduced discretionary and project
work; and the general challenge Serco faced in progressing UK contract
awards given the issues with our UK Government customer. In addition
there were other margin mix effects, such as lower margins on the
initial stages of new contracting areas and the start of the new
five-year pricing period at the Atomic Weapons Establishment.
We continued to focus on driving engagement. Our annual Viewpoint
survey highlighted a generally positive culture but overall levels of
engagement declined slightly in the last 12 months, in part reflecting
the challenging environment Serco has faced.
We also continued to enhance our MyHR human resources system,
positioning us to add new functionality which will support our people
strategy (see pages 53-54).
Following the events of 2013, we recognise the need to rebuild our
relationships and reputation with our UK Government customer and the
public at large, and have started a programme of reputation recovery.
Within our programme of corporate renewal, which was developed
during the last quarter of 2013 and is now being implemented, we are
working to embed a change in our approach to doing business and
to enhance our framework of reporting, systems and controls.
Our people are our greatest asset, so getting our people strategy right is
In 2013 we developed a new leadership model which covers everyone
essential to meeting our strategic goals. Our people strategy therefore aims to
in Serco and will be launched in 2014 (see page 53).
drive the right behaviours, capabilities, structures and incentives. Our focus is
on further developing our leaders, equipping our staff to deliver the very best to
our customers and having employee engagement processes designed to make
Serco a great place to work.
We also look to have the right information technology to support our business,
and to actively manage our brand and reputation, which is increasingly
important as we enter new markets.
Serco Group plc | Annual report and accounts 2013Strategic Report Strategy
Description
Key achievements in 2013
Building
a balanced
portfolio
Driving
improved
service
and margin
Enhancing
our people,
systems
and brand
Our strategy aims to build a balanced portfolio across developed and emerging
markets, frontline and BPO services, and public and private sectors.
We delivered Adjusted revenue growth of 4.7%.
This reduces our exposure to market fluctuations, enables us to select the best
opportunities wherever they arise, and allows us to transfer expertise from one
market to another.
To support our organic growth, we consider acquisitions and strategic
partnerships, which add to the depth of capabilities we can take to our
customers, or enable us to enter new markets for existing service lines.
Our proactive portfolio management also involves ongoing assessment of
our contracts and businesses for strategic fit, expected performance and risk-
adjusted returns. This results in our exit from markets no longer core
to the Group’s future development.
We saw strong organic growth in our AMEAA division and held our
Americas revenues steady, despite a further year of shrinkage in the
US Federal outsourcing market. New contracts supporting US healthcare
eligibility and state transportation services have successfully broadened
our portfolio in this region.
Growth was also achieved in the UK and in our Global Services division.
Reviews such as that covering UK clinical health have led to decisions
to exit early from certain contracts.
In 2013, we divested some operations that had become non-core,
including UK transport maintenance and operational health services.
Underpinning our strategy is our ability to consistently deliver efficient and
high-quality services across the world. As Serco grows, we increasingly look
for opportunities to transfer our capabilities across geographies, so that more
of our capabilities are available to more of our customers.
Growth allows us to drive economies of scale, providing the opportunity
to support our portfolio with shared services, processes and platforms.
These also help bind teams and businesses across sectors and countries.
We therefore continue to develop and share global best practices and aim
to maximise the efficiency of our operations.
Our people are our greatest asset, so getting our people strategy right is
essential to meeting our strategic goals. Our people strategy therefore aims to
drive the right behaviours, capabilities, structures and incentives. Our focus is
on further developing our leaders, equipping our staff to deliver the very best to
our customers and having employee engagement processes designed to make
Serco a great place to work.
We also look to have the right information technology to support our business,
and to actively manage our brand and reputation, which is increasingly
important as we enter new markets.
In 2013, we experienced significant issues with two contracts for the
UK Ministry of Justice (MoJ). Audits of all our other MoJ contracts and
reviews of all our major UK Central Government contracts concluded
to our customers’ satisfaction. Our corporate renewal programme will
also support further service improvement alongside changing attitudes.
2013 was an important year for transitioning operations on major
contracts such as Shop Direct Group and Fiona Stanley Hospital, as well
as starting new, large operations such as those for the US Department of
Health and Human Services’ Centers for Medicare & Medicaid Services
and Virginia Department of Transportation.
Our margin declined in 2013. The principal drivers of margin reduction
included: increased cost investment in contract bidding and new market
development in Global Services; reduced discretionary and project
work; and the general challenge Serco faced in progressing UK contract
awards given the issues with our UK Government customer. In addition
there were other margin mix effects, such as lower margins on the
initial stages of new contracting areas and the start of the new
five-year pricing period at the Atomic Weapons Establishment.
In 2013 we developed a new leadership model which covers everyone
in Serco and will be launched in 2014 (see page 53).
We continued to focus on driving engagement. Our annual Viewpoint
survey highlighted a generally positive culture but overall levels of
engagement declined slightly in the last 12 months, in part reflecting
the challenging environment Serco has faced.
We also continued to enhance our MyHR human resources system,
positioning us to add new functionality which will support our people
strategy (see pages 53-54).
Following the events of 2013, we recognise the need to rebuild our
relationships and reputation with our UK Government customer and the
public at large, and have started a programme of reputation recovery.
Within our programme of corporate renewal, which was developed
during the last quarter of 2013 and is now being implemented, we are
working to embed a change in our approach to doing business and
to enhance our framework of reporting, systems and controls.
11
Strategic Report Principal risks and uncertainties
Principal risks
The Group Risk Register identifies the principal
risks facing the business as a whole, including
those that are managed directly at Group level.
These are managed through a formal process.
More information on our risk management
framework can be found on pages 70 to 73.
The Group’s key stakeholders include, but
are not limited to, customers, shareholders,
suppliers, staff, trade unions, government,
regulators, banks and insurers. The way we
operate as a responsible company recognises
the interests of the community in areas such
as social, environmental and ethical impact, as
described within the Corporate Responsibility
section.
The most significant risks relate to our
reputation, and to operational and financial
performance, which are all direct threats to
the achievement of our strategic objectives.
Summarised on the following pages are the
key risks we have identified that could have
a material impact on our reputation, our
operations or our financial performance.
A number of our other risks reflect social
and ethical issues.
We also have material investments in a
number of joint ventures, where we have
joint control over management practices.
Our representatives within these companies
ensure that their processes and procedures for
identifying and managing risk are appropriate
and that internal controls exist and are regularly
monitored.
We keep reputational and emerging risks under
active review and inform the Board of changes.
Emerging risks cover longer-term risks that
could represent a threat to our activities but
which are not yet sufficiently defined to be
included as active risks.
Group risks and mitigating actions overview
Market risks
Risk | Change in the political environment
Description / Comment
Impact
Mitigation
As a major proportion of Serco’s customers are governments and governmental
agencies, a substantial part of the business is dependent on government policies,
budget priorities and regulatory or political constraints, in particular those regarding
maintaining and improving public infrastructure, which could have a significant impact
on the size, scope, timing and duration of contracts and orders under them and
therefore on the level of business that we may win. As such, these businesses are
susceptible to changes in government, government policy, budget allocations and
the political environment, primarily in the UK, Australia and the US. Any reduction in
such government expenditure and funding could result in a suspension, cancellation,
termination or non-renewal of contracts. Revenues may also be adversely affected
by changes to the UK Government’s, US Government’s or Australian Government’s
policy in respect of outsourcing.
Failure to understand and manage the consequences of changes in the political
environment, adverse changes in political stability, political leadership, policy and
economic conditions will often negatively affect current and future business. The
sustainability of Serco’s business with governments is dependent on normal stable
government and a favourable policy climate to outsourcing. The policy environment
may change and favourable markets may become hostile, leading to loss of business
and reduced opportunities.
●●● Reduction in market opportunities
●●● Changes to terms of existing or
new contracts
●●● Failure to meet growth or profit
●●● Business strategy
●●● Diverse business across
geographies and markets
●●● Dedicated teams regularly
expectations
monitor the political landscape
and government activities,
reporting on government policy
changes and the political
environments where we are
operating. We continue to
develop expertise and capability
in new markets and geographies
12
Serco Group plc | Annual report and accounts 2013Strategic Report Risk | Failure to win a strategic or significant bid or rebid
Description / Comment
Impact
Mitigation
Failure to win material bids or renew material contracts could restrict growth
opportunities for the future or have an adverse impact on Serco’s business, financial
condition and results of operations. Further, a significant number of Serco’s contracts
with the UK Government, the US Government and other public sector customers,
including renewals and extensions of previous contracts, are awarded through formal
competitive bidding processes. Competitive bidding processes present a number of
risks, including substantial cost and management time and effort to prepare bids and
proposals for contracts that may not be won. In addition, there is often a long period
between a successful competition tender offer and entering into definitive contractual
documentation and financial close, and in some cases financial close may not occur.
If Serco does not continue to be competitive, show entrepreneurial spirit and deliver
our promises, it may result in our failing to win material bids or renew material
contracts, which could restrict growth opportunities for the future or have an adverse
impact on Serco’s business, financial condition and results of operations. We will
become increasingly less competitive and our growth will stagnate. Margins will
remain at current levels or reduce, impacting on share price and making us an
increasingly less attractive prospect for investors. Serco will also suffer from losing
money due to the financing of unsuccessful bids.
●●● Failure to meet growth or profit
expectations
●●● Significant financial loss or cost
overrun
●●● Negative reputational impact,
potentially resulting in loss of
existing or new business
●●● Impact on strategic objectives
●●● Business Lifecycle governance
process embedded in SMS
●●● Governance structure managed
through Investment and Ethics
Committee, Programme and
Project Boards, Divisional and
Contract Boards
●●● Business strategy and targets
managed through internal boards
●●● Regular review and monitoring
of Risk Registers
●●● Gate reviews of bids and formal
sign-off process
●●● Robust bidding and contract
review process including
financial, technical and
commercial reviews
Risk | Failure to effectively manage brand / reputation
Description / Comment
Impact
Mitigation
The economic value of our business is significantly impacted by our reputation,
reflected in our share price, rating, ability to attract and retain talent, win business,
attract finance, and maintain our licence to operate. That reputation is held in the
minds of others and broadly consists of their attitudes towards our Company and
the actions they subsequently take. Reputation counts. Our future success will not
just depend on rational factors such as price, pay levels or contractual performance
but also emotional attitudes towards the Company and the contracting market as a
whole. We will need to decide how we wish to define and be seen by the full spectrum
of customers – from the economic buyers to the actual end users and beneficiaries
of the services we provide – and other stakeholders.
The events of last year relating to two UK government contracts have negatively
impacted Serco’s reputation and brand, including our ability to bid for and win
UK Government business during the second half of 2013.
●●● Failure to meet growth or profit
expectations
●●● Significant financial loss or cost
overrun
●●● Loss of contract revenue related
to operations and service charges
●●● Could impact share price
●●● Inability to attract the human and
financial capital necessary to
grow or expand into new markets
●●● Damage to reputation resulting
●●● Governance structure managed
through Investment and Ethics
Committee, Programme and
Project Boards, and Divisional
and Contract Boards
●●● An effective risk, issues and
controls structure identifies
potential reputational impacts,
allowing effective management
and oversight
●●● Customer engagement and
in loss of existing or new business
employee engagement strategies
●●● Impact on strategic objectives
●●● Relationship management
and communication with
external stakeholders.
13
Strategic Report Principal risks and uncertainties
Operational risks
Risk | Major information security breach
Description / Comment
Impact
Mitigation
Serco must comply with restrictions on the handling of sensitive information (including
personal and customer) and provide for secure transmission of such information.
This is a heightened risk, particularly with respect to government contracts, due to
the sensitive and confidential nature of government data. Despite controls to ensure
the confidentiality of such information, Serco may breach restrictions or be subject
to cyber attacks (e.g. from computer programs or hacktivist groups) that may attempt
to penetrate its network security and misappropriate confidential information.
●●● Loss of service to our customers
●●● Damage to reputation, resulting
in loss of existing or new
business such as disqualification
from future tenders or contract
termination
●●● Impact on strategic objectives
●●● Costly to rectify and potential for
dilution of shareholder returns
●●● Criminal and civil action
●●● Contract and business external
accreditations withdrawn
●●● Significant media attention and
future scrutiny
●●● Security and information systems
policies, systems and embedded
governance structure
●●● Think Privacy campaign to raise
staff awareness, provide training,
promote incident reporting and
strengthen control processes
●●● Cyber security contract
●●● Risk assessments
●●● Cyber resilience of enterprise
applications
●●● User management, multifactor
authentication, user awareness
●●● Regular risk reviews
●●● ISO 27000 certification
Governance risks
Risk | Significant incident of bribery or corrupt practice
Description / Comment
Impact
Mitigation
Serco operates in international markets, which brings with it inherent risks including
bribery and corruption, particularly in certain developing nations.
Serco operates in a number of countries which are recognised as having a higher
bribery and corruption risk. Increasing legislation significantly increases the
consequences of bribes and other corrupt practices.
●●● Legal action and fines against
●●● Policies and systems embedded
the company
●●● Debarment from tender lists
●●● Damage to reputation resulting
in loss of existing or new business
●●● Significant media attention and
future scrutiny
in SMS
●●● Code of Conduct
●●● Ethics Committee
●●● Speak Up process
●●● Ethics and compliance
programme and training
●●● Risk assessment
●●● Third-party contracts
14
Serco Group plc | Annual report and accounts 2013Strategic Report People risks
Risk | Failure to retain / attract key leadership talent
Description / Comment
Impact
Mitigation
The success of the company depends on the efforts, abilities, experience and
expertise of the senior management teams and on recruiting, retaining, motivating,
effectively communicating with and developing highly skilled and competent people
at all levels of the organisation. There can be intense competition for personnel
from other companies and organisations and there may at any time be shortages
in the availability of appropriately skilled people at all levels within Serco. Further,
the company cannot guarantee the retention of such key executives and technical
personnel. The failure of the company to retain and/or recruit additional or substitute
senior managers and/or other key employees could have a material adverse effect
on its business.
●●● Risk of not achieving level of
●●● People policies and systems,
planned growth
●●● Increased cost in recruitment
activity and time taken to fill roles
●●● Instability and loss of business
continuity
●●● Dilution of brand and values
●●● Reduced employee engagement
through loss of compelling
leadership
●●● Strengthen competitors through
loss of leaders to them
strategy and targets supported
by governance structure,
including Remuneration
Committee
●●● Succession planning
●●● Leadership model
●●● Annual external (independent)
remuneration review
●●● Job structure and grading system
●●● Talent database and leadership
development programme
●●● Employment engagement
strategy, including annual
staff survey
Finance risks
Risk | The impairment of goodwill could adversely impact reported results
Description / Comment
Impact
Mitigation
Goodwill accounted for 45% of Serco Group’s recorded total assets as at
31 December 2013. Serco evaluates goodwill for impairment annually or more
frequently when evidence of potential impairment exists. Any decrease in expected
cash flows or deterioration in market conditions could require Serco to record
impairment charges that could have a material impact on the financial position
and results of operations.
●●● Inability to meet profit
●●● Internal board and governance
expectations
structure
●●● Potential for breach of financial
covenants
●●● Damage to reputation and
shareholder confidence
●●● Strategic plans
●●● Business plans
●●● Business Lifecycle Governance
process
●●● Impact on strategic objectives
●●● Financial review and reporting
15
Strategic Report Key performance indicators
In 2013, we used the key performance indicators
(KPIs) below to monitor our performance. They are
split between financial and non-financial measures.
As part of our corporate renewal programme,
we are reviewing our KPIs. This will ensure we
have a balanced set of metrics that gives
appropriate emphasis to both the financial
and non-financial aspects of our performance,
and will include customer satisfaction,
people engagement and contract
compliance indicators.
Financial
Adjusted revenue (£m)
Mitigation
Definition
Adjusted revenue represents the amounts due
for goods and services we provided during the
year and includes our share of revenue from
joint ventures. Adjusted revenue is stated net
of discounts, VAT and other sales-related taxes.
4,913
5,144
4,646
4,327
3,970
Relevance to strategy
Our revenue growth flows directly from
successful implementation of all aspects of
our strategy – a balanced portfolio of growth
opportunities, delivering improved service for
customers and ensuring we have the right
people, systems and processes.
Performance
Growth of 4.7% year on year was a good
performance considering the issues in the
UK encountered in the second half of the
year. Growth was driven primarily by contract
awards in the previous year and high levels
of organic revenue in AMEAA.
2009
2010
2011
2012
2013
Adjusted operating profit (£m)
Mitigation
Definition
Adjusted operating profit is before amortisation
of intangibles arising on acquisitions,
transaction-related costs and exceptional
items, as shown on the face of the Group’s
consolidated income statement and the
accompanying notes. In 2013, it is before
management’s estimation of other costs in
relation to the UK Government reviews.
Figures for 2009-2012 have been restated for
changes in accounting policies.
Adjusted earnings per share (EPS) (p)
Definition
Adjusted earnings per share is calculated on
the basis of earnings before amortisation of
intangibles arising on acquisitions, transaction-
related costs and exceptional items, as shown
on the face of the Group’s consolidated income
statement and the accompanying notes. It is
also before management’s estimation of other
costs in relation to the UK Government reviews.
In addition, Adjusted earnings per share takes
account of the tax effect of these adjusting items.
Figures for 2009-2012 have been restated for
changes in accounting policies.
Group free cash flow (£m)
Definition
Group free cash flow is the free cash flow
generated by our subsidiaries plus the
dividends we receive from joint ventures.
16
314
289
292
258
229
Relevance to strategy
Adjusted operating profit reflects the ability
to win and retain contracts with appropriate
margins, sustaining or improving margin
through efficient operations, and proactive
portfolio management to ensure appropriate
performance and returns.
Performance
The decline of 7.0% represents a decrease
in margin from 6.4% to 5.7%, reflecting the
increased investment in market development
activity in the Global Services division;
reduced project work and the general
challenge faced in the latter part of the year;
and other margin mix effects.
2009
2010
2011
2012
2013
41.55
39.53
38.14
33.96
30.39
Relevance to strategy
Adjusted EPS reflects the ability to grow both
revenue and Adjusted operating profit margin,
together with the strength of funding and
overall financial position.
Performance
The decline of 4.9% reflects the challenges
faced in the second half of the year.
2009
2010
2011
2012
2013
185.8
181.2
168.3
137.3
84.8
2009
2010
2011
2012
2013
Mitigation
Relevance to strategy
Group free cash flow reflects our ability to
generate funds to invest in our future growth
and strategic development.
Performance
The reduction in Group free cash flow
principally reflected the increase in the level
of working capital relating to the timing
difference between the period when costs
are incurred in the delivery of the contract
and the period when we can contractually
bill our customer, and lower dividends from
joint ventures.
Serco Group plc | Annual report and accounts 2013Strategic Report
Non-financial
Major reportable incident rate (per 100,000 employees)
Definition
Major injuries are classed as fatalities,
fractures, amputations, dislocations, loss of
sight, chemical and hot metal burns, electrical
burns, unconsciousness caused by asphyxia
or exposure to a harmful substance, and acute
illness resulting from substance inhalation
or ingestion. The rate measures our success
in providing a safe and secure working
environment and excludes joint ventures.
76.8
58.4
67.0
51.5
33.4
2009
2010
2011
2012
2013
Carbon emissions headcount intensity (tonnes of C02 e per FTE)
Definition
We report our greenhouse gas emissions as
tonnes of CO2e per full time equivalent (FTE)
employee. This normalises our emissions to the
size of our business. In 2013, we adopted ISO
14064-1 2012 to ensure we meet greenhouse
gas reporting requirements and provide a fair
and transparent picture of our greenhouse gas
emissions. This has resulted in us capturing
far more comprehensive data than in previous
years. As a result, we are using 2013 as the
baseline for future reporting.
2013
4.04
Investment in society (£m)
Definition
Each year, we aim to invest 1% of our Adjusted
pre-tax profits into society. We do this through
cash donations, gifts in kind, employee
volunteering and management time.
2.53
2.56
2.58
2.27
1.75
2009
2010
2011
2012
2013
Relevance to strategy
Delivering excellent service to our customers
requires us to operate in the safest way
possible. Safety also has a direct bearing
on the commitment and engagement of
our people.
Performance
The number of major reportable incidents fell
by 45% to 33 in 2013, resulting in a rate of
33.4 per 100,000 employees. This was well
ahead of our target of 57 and the UK Health
and Safety Executive Total Service Industries
benchmark of 91.5.
Relevance to strategy
Our carbon dioxide emissions are directly
related to our energy use, and hence to the
efficiency of our operations.
Performance
Our emissions in 2013 were 4.04 tonnes
of CO2e per FTE.
Relevance to strategy
Strong community relationships help us to
win and retain contracts and to engage our
people, as well as directly benefiting the lives
of the people we assist.
Performance
We invested £2,575,029 through donations
of money, assets and time to community
projects and charities, representing 1% of
our Adjusted pre-tax profit.
For more on our non-financial KPIs see the
Corporate Responsibility section on pages 52 to 57
and greenhouse gas emissions on pages 58 to 59
17
Strategic Report Chief Executive’s statement
Ed Casey, Acting Group Chief
Executive, said: “We have been
through a difficult year and there
remains much to be done to
ensure the agreed programme of
corporate renewal is successfully
implemented. However, the work
we have completed and the
undertakings we have made
demonstrate our commitment
to achieving this.
“The events of 2013 absorbed
management’s focus and,
therefore, interrupted the normal
process of improving efficiency
and developing our business into
new areas. Over the second half of
2013 and until the end of January
2014, we were not able to be
awarded new contracts by UK
Central Government, which also
had an impact on the development
of our business in certain
other sectors.
“Our focus is clear: to ensure that
the Group has stable operations,
appropriate operational controls
and differentiated capabilities, to
make the most of the breadth of
our offering across frontline and
middle and back office services,
and our referenceability from one
country to another. I am confident
that these attributes will enable
Serco’s return to growth, in what
remain fundamentally attractive
service markets around the world.”
2013 has brought significant challenges,
in particular from certain contract issues with
the UK Ministry of Justice. Organic revenue
growth was 5.9%, driven principally from
contract awards in the previous year. Profitability
declined due to less work with UK Central
Government and fewer wins in the BPO market.
Net exceptional charges, reflecting principally
the Electronic Monitoring settlement, totalled
£90.5m, with other indirect costs and charges
related to the effects the UK Government
reviews had on the business estimated by
management at £21.0m. Adjusted EPS, before
these exceptional charges and costs, were
39.53p, a decline of 2.1% at constant currency.
Free cash flow also declined in the year.
The dividend payment is increasing, reflecting
our ongoing transition to a higher payout ratio.
The Group maintains a robust financing position.
The value of contract awards totalled £3.7bn
in the year, with further progress made on
the strategic positioning of our portfolio. The
outlook for 2014 remains challenging, with lower
profits anticipated. We will continue our efforts
to rebuild the confidence of our UK Government
customer and strengthen the Group as a whole,
through the comprehensive corporate renewal
programme. There is ongoing demand in
large and growing markets for our services,
with a pipeline of opportunities to take the
business forward.
Organic revenue growth of 5.9%
for the Group
Adjusted revenue from ongoing activities
was £5.1bn, a growth of 7.8% at constant
currency. Excluding incremental revenue from
acquisitions, our portfolio across multiple
markets and varied conditions delivered
organic revenue growth of 5.9%.
contract issues impacted the second half of
the year, whilst we worked to regain eligibility
for new UK Central Government contract
awards. Good progress continued to be made
on extending existing contracts in areas such
as environmental services, non-clinical health
operations and defence training and support.
In the Americas division revenue held steady,
a positive outcome given the third year of a
declining and uncertain US federal contracting
market, driven by government budget and
funding issues. Momentum was achieved
in the second half of the year, through the
start of major new contracts in healthcare
eligibility processing and state government
transportation support.
The AMEAA division achieved organic revenue
growth of 18%. A significant proportion of
this was due to an increased volume of work
providing immigration services in Australia. This
contract, having grown to be the largest within
the Group, began to see lower volume levels
by the end of the year, following significant
changes to government policies that are
expected to continue to reduce the size of
the contract in 2014. Numerous new contract
developments were achieved in other parts
of the region, particularly the Middle East.
The Global Services division, representing
Serco’s BPO middle and back office skills and
capabilities, achieved organic revenue growth
of 5% in 2013. After a strong first half, which
included the first year of operation of previous
new relationships such as Shop Direct and
AEGON UK, the second half saw performance
weaken. There was a lower level of work with UK
Central Government customers and fewer major
private sector bids were won than in 2012.
In the UK & Europe division, organic revenue
growth was 3% in 2013. This was driven by the
additional revenue in the first half from previous
new contracts in their initial year of operation,
including community healthcare in Suffolk, the
Northern Isles ferry services in Scotland, and
asylum applicant accommodation and transport
services in North West England and Scotland &
Northern Ireland. The Electronic Monitoring (EM)
and Prisoner Escort & Custody Services (PECS)
Reduced profit and cash generation
Adjusted operating profit from ongoing activities
was £285.4m, representing a 2.3% decline
at constant currency and a margin decline to
5.6% compared to 6.3% in 2012. The principal
drivers of the margin reduction included:
increased investment in contract bidding and
new market development activity in the Global
Services division; reduced discretionary and
ad hoc project work and the general challenge
We operate the national network of immigration centres
for the Australian Department of Immigration and
Border Protection.
18
Serco Group plc | Annual report and accounts 2013Strategic Report Serco faced in progressing UK contract awards
over the latter part of the year; and other
margin mix effects, such as lower margins on
initial stages of new contracts or from related
operational issues, and the start of the new
five-year pricing period at the Atomic Weapons
Establishment (AWE).
the Electronic Monitoring contract, as well
as the direct one-off costs regarding the
UK Central Government audits and reviews,
and the development of Serco’s corporate
renewal programme. In addition, there were
an estimated £21.0m of other related costs.
Adjusted profit before tax was £254.4m and
Adjusted earnings per share were 39.53p,
declining by 3.6% and 2.1% respectively
at constant currency.
The Group incurred a net exceptional charge
of £90.5m in the year. This reflected principally
the settlement reached with the UK Ministry
of Justice in respect of the issues arising on
Group free cash flow declined to £84.8m
compared with £181.2m in the previous year.
There was an anticipated incremental working
capital investment in BPO activities and lower
dividends from joint ventures. There was a
greater adverse timing impact that reduced
cash flows on certain contracts, including some
delays to customer payments and some timing
differences of cash costs incurred compared
to our contractual customer invoicing profile.
Earnings, cash flow, financing and related
matters are described fully in the Finance
Review on pages 42 to 51.
Increased total dividend for the year
and robust financing position
The Board has proposed an increase of 4.5% to
10.55p in the total dividend for the year, holding
the 2013 final dividend at last year’s 7.45p.
This reflects our ongoing transition to a higher
payout ratio. Based on Adjusted basic earnings
per share of 39.53p, the dividend represents
a payout of 27% (2012: 24%), or dividend cover
of 3.75x (2012: 4.11x). The Board set out in
2013 the intention to move to dividend cover
of 2.5-3x over time, beyond which point it would
expect to revert to increasing the total dividend
Ed Casey
Acting Group Chief Executive
19
Strategic Report Chief Executive’s statement
Continued
●●● Environmental services for various UK
councils (£100m over four-to-eight year terms)
●●● City of Colorado Springs fleet management
and maintenance services (US$35m over
five years)
●●● Non-clinical support services for Plymouth
Hospitals NHS Trust (£40m over three years)
●●● Dubai Metro operation and maintenance
●●● Multi-engine pilot training at RAF Cranwell
(£36m over five years)
●●● Parking enforcement services for London
borough councils (£30m over five years)
each year in line with the increase in underlying
earnings. The final dividend will be paid, subject
to shareholder approval, on 14 May 2014 to
shareholders on the register on 14 March 2014.
●●● European Space Agency operational
IT support for satellite infrastructure
(€30m over five years)
(£355m over five years)
●●● Australian immigration detention services
(volume-related value over six months)
●●● Hong Kong road transportation
management, operation and maintenance
(£80m over six years)
●●● Facilities management services in the United
Arab Emirates (£30m over six years)
Serco also maintains sufficient and suitable
financing strength and funding arrangements for
anticipated corporate purposes. Adjusted total
net debt has increased from £581m to £701m,
principally as a result of the cash payments
related to the exceptional charges. The Group’s
financial leverage ratio remains, however,
suitably below our credit facility financial
covenants.
Further progress on contract awards
and strategic positioning
Contract awards in 2013 totalled £3.7bn,
representing signed contracts valued at £3.5bn
and preferred bidder appointments of a further
£0.2bn. Our order book stood at £17.1bn at
31 December 2013 (£19.1bn at 31 December
2012). Wins included smaller and medium-sized
awards which are important to growth, as well
as significant rebids, extensions, expansions
and new contracts. Of the total contract award
value, approximately 40% reflected services
newly contracted with Serco, with approximately
60% being rebids or extensions.
Notable contract awards, along with
approximate total value and contract length
where appropriate, included:
●●● Build and operate additional capacity at
HMP Thameside (£120m over 22 years)
●●● Operation of the Docklands Light Railway
in London (£100m over 18 months)
●●● Defence Science and Technology Laboratory
(Dstl) procurement services (£15-25m over
seven years)
●●● Iraq air traffic control services, training and
support (£24m over 18 months)
●●● Barclays Cycle Hire phase 3 expansion
●●● Tramway operation and maintenance in
in London (£15m over three years)
Dubai (£18m over five years)
●●● European Parliament telephony and
communication equipment support
(€17m over six years)
●●● Middle East logistics and base support for
the Australian Defence Force (£18m over
one year)
●●● Pre-deployment training for the UK’s Ministry
●●● Healthcare support services in Abu Dhabi
of Defence (£10m over one year)
(£5m over three years)
●●● US healthcare eligibility processing support
(excluding optional tasks, US$600m over
five years)
●●● Procurement, finance and accounting
services for an NHS Hospital Trust
(£112m over four years)
●●● Driver examination services in Ontario,
Canada (C$500m over ten years)
●●● Virginia Department of Transportation
●●● UK Central Government BPO services
including Child Maintenance Group
(£100m over three years)
(VDOT) operational services (US$355m over
six years)
●●● Customer management services for UK leading
high street retailer (£50m over ten years)
●●● US IDIQ task orders – across areas including
●●● Public sector shared services for the United
IT systems and services, human capital
management, engineering support, logistics
and programme management – totalling over
US$180m
Arab Emirates (£24m over four years)
●●● Citizen contact services and ICT support for
UK councils (totalling £20m over five years)
●●● Systems engineering and technical
assistance for US intelligence community
(US$40m over five years)
●●● BPO services for Indian banking, energy
and telecom customers (totalling £20m
over three years)
During 2013, we delivered the expansion of Barclays
Cycle Hire to western boroughs of London.
20
Serco Group plc | Annual report and accounts 2013Strategic Report More details of some of these awards are in
the Divisional Reviews, with further information
and other smaller and medium-sized awards
described in the contract news updates and
announcements on www.serco.com.
New contract awards in the Americas
division are broadening our portfolio in this
region. We successfully leveraged Serco’s
global capabilities to achieve growth in the
transportation market; the VDOT contract
deepens our credentials further and the
successful rebid of driver examination services
in Canada strengthens our managed service
capability. The award by the United States
Department of Health and Human Services’
Centers for Medicare & Medicaid Services
(CMS), where Serco is providing eligibility
processing support for the new federally-
facilitated marketplace, is a significant
development for our involvement in
US healthcare and expands our customer
reach in an attractive market.
Our proactive portfolio management involves
an ongoing assessment of operations against
their fit to the Group’s strategy. This has
resulted in further disposals – principally our
UK occupational health and UK transport
maintenance and technology businesses –
which had become non-core to Serco’s future
development in the health and transportation
markets. While remaining primarily focused on
organic growth, we would consider potential
infill acquisitions that bring additional skills,
capabilities or market access to enhance the
portfolio. We will also continue to evaluate the
potential for further non-core disposals.
Challenging near-term outlook
As previously disclosed, our business plans
reflect specific challenges that lead us to expect
a further reduction in profits in 2014. At the
same time, we are working to secure Serco’s
position in large and growing markets, to
strengthen our performance in the longer term.
In 2014, the level of contract attrition will
have a greater impact than the Group has
faced in the past. The incremental revenue
contribution from new contract awards is not
expected to fully offset the attrition, with this
in part a consequence of the issues faced in
the latter part of 2013. The most significant
factor is that following recent immigration policy
changes, lower volumes of work in Australia are
anticipated to reduce Group revenue further;
our operations which grew to over £450m
of revenue in 2013 could reduce up to 50%,
though the nature of this work makes it difficult
to forecast. These factors are each described
more fully in the Divisional Reviews.
Serco’s revenue visibility from its order book
as at the start of this year was 77% for 2014
and 52% for 2015. This reflects the progress
made during 2013 in securing rebids and
extensions, as well as the contribution of new
wins. Recurring task orders, project work and
additional services for existing customers
typically add a further 5-10% to the Group’s total
visibility in individual years. There is additional
revenue that can be secured through known
near-term extension and rebid processes,
amounting to 8% of anticipated Group revenue
in 2014 and 19% in 2015. Major contracts due
for extension or rebid, with their approximate
contribution to Group revenue in 2013 and
existing contract end date, are as follows:
●●● Australian immigration detention services
(9%, December 2014)
●●● Northern Rail franchise in the UK, operated
in partnership with Abellio (6%, April 2014)
●●● Defence garrison support services in
Australia, operated in partnership with
Sodexo (2%, June 2014)
●●● Operation of the Docklands Light Railway
in London (2%, September 2014)
●●● Systems engineering and technical
assistance contracts for a US intelligence
agency (1%, 2014)
Serco’s internal forecasts for 2014 imply a
mid-single digit percentage decline in terms of
Group organic revenue. This takes into account
the above factors, including assumed success
in securing rebids and extensions, as well as
assumed incremental revenue contribution
from successful outcomes of current bid
opportunities. Compared to £5.1bn of Adjusted
revenue from ongoing activities in 2013,
for 2014 we anticipate £4.7-4.9bn at
constant currency.
Our internal forecasts for 2014 also imply
a further reduction in the Group’s Adjusted
operating margin of 50-100 basis points. This
takes into account the impact on the average
margin of the above-mentioned revenue factors,
together with the ongoing incremental cost
of corporate renewal programme delivery,
estimated at approximately £10m.
Based on the above, the Group’s Adjusted
operating profit in 2014 would be approximately
£220-250m at constant currency. This compares
to £285.4m Adjusted operating profit from
ongoing activities for 2013.
Adjusted net finance costs are anticipated to be
approximately £40m. The Adjusted effective tax
rate and weighted average number of shares
are also expected to be broadly unchanged.
This would result in Adjusted EPS of 28-33p
at constant currency. As previously announced,
a restructuring charge estimated at £10-15m
will be incurred in 2014 to implement further
reductions in headcount and related costs,
and one-off costs to implement the corporate
renewal programme are estimated at £15m.
Our constant currency forecasts assume the
average exchange rates in 2013 prevail through
2014. The Group has approximately half of its
revenue in non-sterling currencies, therefore if
the sterling average rate were stronger in 2014
then the Group’s results in reported currency
terms would reduce, and vice versa.
Free cash flow in 2014 is anticipated to be
higher than 2013, reflecting lower working
capital investment in BPO activity and some
reversal of the adverse timing impacts
experienced in 2013. Net debt at the end of the
year is expected to be broadly unchanged from
that at the end of 2013. The Group anticipates
that sufficient financing headroom would
be maintained.
From left:
With our partner Abellio, we run Northern Rail,
the UK’s largest train franchise.
In Hong Kong, we are market leader in managing,
operating and maintaining road tunnels, bridges
and related tollway infrastructure.
21
Strategic Report Chief Executive’s statement
Continued
Securing Serco’s position in large
and growing markets
The focus of 2014 will be to take the actions
necessary to return the business to longer term
growth in revenue and profitability. Whilst Serco
has strong foundations in its breadth of proven
capabilities across frontline, middle and back
office services, its long history of delivering
excellent service and its geographical reach,
there is much to do in 2014. We must stabilise
those UK operations impacted by the events of
2013, implement the plan of corporate renewal,
re-establish our momentum within our markets,
particularly in the UK and the private sector,
and ensure we continue to build differentiated
capabilities that will secure the Group’s future
progress in large and growing markets.
Our various public service operations for UK
Government make it collectively our single
largest customer, with 2013 and 2014 involving
substantial effort to rebuild confidence in
Serco. There have been three main areas of
activity. Firstly, we cooperated fully with the
detailed independent forensic audit of the EM
contract, the separate audits of our other MoJ
contracts and the Cabinet Office’s wider review
across our other major UK Central Government
contracts. Beyond the EM and PECS issues
that had previously been identified, no further
material issues were raised and the audits and
reviews were, therefore, concluded satisfactorily
by the end of 2013.
Secondly, Serco agreed a settlement with the
MoJ in respect of the issues arising on the EM
contract. The settlement reflected the difference
in interpretation regarding billing arrangements
for the EM contract since 2005, together
with a repayment of an element of past profit
earned on the contract, interest and the UK
Government’s costs of the audits and reviews.
Thirdly, Serco has developed and is now in the
process of implementing the comprehensive
programme of corporate renewal that we
outlined in our announcement in January
2014, to ensure consistency of behaviours and
strengthen operations across the Group. Our
plan was assessed externally by an Oversight
Group of Government non-executive directors,
with independent advisers appointed by the
Government to review our progress against
agreed milestones. In January 2014, a positive
assessment was provided on our programme,
confirming Serco’s consideration on an equal
basis to other suppliers for current Central
Government contract awards.
We are tracking a total opportunity pipeline
valued at an estimated £29bn. Versus a year
ago, the reduction from approximately £31bn
reflects where we have won, lost or taken the
decision to withdraw from bidding. Over the
next two years, our pipeline of new bids, which
excludes the value of rebids and potential
extensions, has an estimated total value
of £12bn, or aggregate annual revenue of
approximately £1.4bn. This near-term pipeline
consists of approximately 40 opportunities
that each have anticipated annual revenue of
at least £10m and are at a relatively advanced
stage of tendering. Described in more detail
in the Divisional Reviews, examples of notable
opportunities include those for:
●●● UK Defence Infrastructure Organisation (DIO)
A stronger Serco will be positioned to benefit
from the ongoing demand for efficient, high
quality and innovative service provision, from
public and private sector customers around
the world. In each of our major markets – the
UK, the US and the countries in which we
operate within the AMEAA region – there is
substantial spend by governments that is
expected to continue to generate long-term
growth in each of our main areas of service
provision: Transport; Defence; Home Affairs
(including justice, borders and welfare services);
Health; and other areas of integrated facilities
management. Our latest assessment of the total
addressable market spend in these areas is
equivalent to over £150bn of annual spend.
In overall terms, total government expenditure
that has been outsourced to date as service
contracts is estimated at 10-20%, with policy
development suggesting that governments
will continue to expand this proportion. In
developed economies, the primary driver
remains fiscal pressure on government
spending, while the established presence that
Serco also has in developing economies adds
further opportunity, given the likely continued
higher growth in demand for new or significantly
improved services for citizens. Meanwhile, the
global BPO market is both large and continues
to grow, and Serco will look to further develop
its strategic positioning with both private sector
and public sector customers in this market.
●●● UK Magnox nuclear site
decommissioning activities
●●● UK transport operations, such as the
Caledonian Sleeper rail service and
Clyde & Hebrides ferry services
●●● UK military air traffic management
support services
●●● UK NHS trust integrated facilities
management
●●● UK local council environmental
services opportunities
●●● US Navy systems and engineering services
●●● US Patent & Trademark Office
citizen services
●●● US Department of State passport services
●●● US state transportation operations
●●● Australia new-build prison in Victoria
●●● Sydney North West Rail link and light rail
opportunities in the region
●●● Middle East air navigation and other
transport systems operation
We run lifeline passenger and freight ferry
services to the Northern Isles in Scotland.
22
Serco Group plc | Annual report and accounts 2013Strategic Report ●●● Private sector customer contact, account
management and multi-channel support
services bids
●●● Public sector citizen contact and other
BPO support
Serco’s portfolio of operations and opportunities
around the world continues to provide elements
of both resilience and future growth potential.
Whilst the Group has a challenging near-term
outlook, and successful delivery of corporate
renewal is required, our position should be
restored to one of strength in what remain large
and growing markets. There exists a balance
of risks and opportunities, but the Board is
confident in the potential for Serco’s long-term
growth. While we will strategically review our
involvement in certain markets, and continue
our proactive portfolio management, the
Group’s strategy remains to operate a strong
and diverse contract portfolio, reducing our
exposure to market fluctuations, enabling us to
select the best opportunities where they arise
and allowing us to transfer expertise and insight
across sectors and geographies.
Ed Casey
Acting Group Chief Executive
From left:
We are a major supplier of support services
to UK hospitals.
The Middle East is home to some of Serco’s
longest standing air traffic control contracts.
23
Strategic Report Divisional reviews
This section is presented according to the four
divisions, based around our principal markets:
● UK & Europe
● Americas
● AMEAA (Australasia, Middle East,
Asia and Africa), and
● Global Services
The section includes references to contract
awards which are significant because of their
value or their strategic contribution to our business.
Further details of these, as well as other medium
and smaller-sized contracts, can be found on
our website www.serco.com.
UK & Europe
The UK & Europe division
includes our frontline services in:
Transport & Local Direct Services;
Defence & Science; Home Affairs
(encompassing justice-related
operations, immigration and
border security, and welfare);
and Health.
Transport & Local Direct Services
We are a key provider of transport services in
the UK. With our partner Abellio, we run both
Northern Rail, the UK’s largest train franchise,
and Merseyrail, the UK’s most punctual train
operator. In London, we run the Docklands Light
Railway and the Barclays Cycle Hire scheme,
supporting growth in regular journeys as well
as major events such as the London Marathon,
the Diamond Jubilee and the 2012 Olympic
Games. During 2013, we also provided traffic
management operations and local authority
parking enforcement in the capital. In Scotland,
Serco runs lifeline passenger and freight ferry
services to the Northern Isles.
Serco provides environmental services and
manages leisure facilities for local councils and
community leisure trusts across Britain. Our
environmental services include refuse collection,
recycling, street cleansing and grounds
maintenance. Our leisure business provides a
comprehensive range of health, leisure, fitness,
well-being and community focused services.
Defence & Science
Serco works for the Royal Air Force, the Army
Air Corps and the Royal Navy’s Fleet Air Arm,
providing services such as training, engineering
or operational support.
We also support the Royal Navy’s three main
UK bases and operate and maintain strategic
assets such as secure satellite communications,
the Defence Academy of the United Kingdom,
the Emergency Planning College on behalf of
the Cabinet Office, and the UK’s ballistic missile
early warning system.
We provide systems engineering, safety
assurance and risk management services,
and support the essential research carried
out at the Defence Science and Technology
Laboratory (Dstl). Our joint venture with
Lockheed Martin and Jacobs Engineering
manages the Atomic Weapons Establishment
(AWE), which provides the warheads for the
UK’s nuclear deterrent.
Home Affairs
Serco is a leading custodial accommodation
provider, operating six adult prisons in England
and Scotland. These include HMP & YOI
Doncaster, which has been piloting Payment
by Results, and HMP Thameside, one of
the world’s most technologically advanced
prisons. We also run the secure training centre
at Hassockfield in County Durham, for young
people aged between 12 and 17 years who
are either awaiting trial or serving sentences.
From left:
We extended our Multi-Activity Contract at
RAF Brize Norton during 2013.
In 2013, we achieved all-time high performance
at the Docklands Light Railway in London.
24
Serco Group plc | Annual report and accounts 2013Strategic Report From left:
We operate HMP Thameside, one of the world’s most
technologically advanced prisons.
Our operations for Sandwell Metropolitan Borough
Council saw the opening of a new £10m waste transfer
station, handling 1,700 tonnes of waste and recycling
each week.
25
Strategic Report Divisional reviews
UK & Europe
Continued
During 2013, we have provided prisoner escort
and custody services in London and the South
East of England, and electronically monitored
defendants and offenders subject to home
curfew. In partnership with the London Probation
Trust, we have delivered Community Payback,
which requires offenders to do unpaid work for
the community. On behalf of the Home Office,
we run two immigration removal centres and
provide technology services for border control
and security. We also provide accommodation
and transport services for asylum applicants
in the North West of England, Scotland and
Northern Ireland.
As part of the Department for Work &
Pensions’ Work Programme, Serco and its
partners are placing thousands of jobseekers
into sustainable employment. A Serco-led
consortium also operates the National Citizen
Service in six regions across the country,
enabling 16 and 17-year-olds to develop skills
through projects that contribute to society.
Health
Serco delivers GP out-of-hours services in
Cornwall and provides a comprehensive range
of clinical services in the community in Suffolk.
We are the largest independent provider of
custodial health services. We are also a major
supplier of support services to a number
of UK hospitals. GSTS Pathology, our joint
venture with two major NHS teaching hospitals,
is the UK’s leading independent pathology
services provider.
UK & Europe – 2013 review
Adjusted revenue from ongoing activities
grew by 3% to £2,514m (2012: £2,436m), and
represented 49% of the Group (2012: 51%).
On an organic basis, revenue also grew by
3%. Adjusted operating profit from ongoing
operations declined by 8% to £150.7m (2012:
£163.4m), with the margin declining to 6.0%
(2012: 6.7%). Including the impact of disposals,
Adjusted revenue was broadly flat at £2,557m
(2012: £2,561m) and Adjusted operating profit
declined by 11% to £157.3m (2012: £177.1m).
Whilst the first half of 2013 grew strongly, driven
principally by the additional revenue of the
new contracts that started in the second half of
2012, as well as additional project-based work
on certain contracts, the issues that arose with
the UK Government impacted our business in
the second half of the year. As a consequence,
revenue in the second half declined against
the comparable period in 2012, given the lower
contribution from new contract starts and less
discretionary and ad hoc project work.
The margin reduction reflected the initial stages
of the major new contract starts, which tend to
involve greater upfront investment, the effect
of the new five-year pricing period for our
management and operation of AWE and the
lower margin on managing capital projects
for certain customers.
Transport & Local Direct Services
Operations across Transport & Local Direct
Services accounted for approximately 40%
of UK & Europe Adjusted revenue from
ongoing activities.
At Northern Rail, in the most recent National
Passenger Survey (NPS), overall customer
satisfaction was broadly level on a year earlier.
We continue to invest in areas that will improve
our customers’ experience with us, including the
upkeep of our trains and keeping passengers
informed. The challenge of increasing capacity
will be a major focus for the successor
franchise, which we would anticipate bidding
on during 2015, ahead of its start in February
2016. At Merseyrail, we are very pleased that it
has continued to be ranked top in the NPS for
overall customer satisfaction. At the Docklands
Light Railway, all-time high performance
metrics were achieved in the year and an
From left:
We provide a comprehensive range of community
health services in Suffolk.
Merseyrail is the UK’s most punctual train operator
and continues to be ranked top for overall customer
satisfaction in the National Passenger Survey.
26
Serco Group plc | Annual report and accounts 2013Strategic Report We support the Royal Navy’s Fleet Air Arm at RNAS Yeovilton.
18-month extension was signed with a value
of approximately £100m.
Ferry services to the Northern Isles of Scotland
completed their first full year under Serco’s
management. This has seen the refurbishment
of all three passenger vessels and numerous
other improvements delivered to assist
increasing usage of the lifeline freight and
passenger services. In similar operations,
Serco and its local joint venture partner
Strömma Turism & Sjöfart AB were selected
during the year to manage and operate
four ferries currently carrying over two million
passengers annually in Stockholm.
Serco delivered the phase 3 expansion of
Barclays Cycle Hire for Transport for London,
adding approximately 5,600 new docking points
and 2,400 new bikes to western boroughs.
Serco was also awarded an innovative new
contract to provide end-to-end on-street parking
enforcement for the West London Alliance,
a partnership between Ealing, Hounslow
and Brent borough councils.
In Local Direct Services, Serco successfully
extended or rebid its contracts for environmental
services for Canterbury City Council, Welwyn
Hatfield Borough Council and Breckland Borough
Council, valued in total at over £100m. Our
operations for Sandwell Metropolitan Borough
Council saw the opening of a new £10m waste
transfer station in Tipton, handling more than
1,700 tonnes of waste and recycling each week.
Defence & Science
Operations across Defence & Science
accounted for approximately 30% of UK
& Europe Adjusted revenue.
Our management and operation of AWE,
as part of a joint venture with Lockheed Martin
and Jacobs Engineering, began the next
five-year pricing period in April 2013. Strong
operational performance and programme
delivery has continued. Projects that became
fully operational in the period included Orion,
AWE’s new laser facility, which is now one of the
world’s most powerful lasers and of immense
interest both internationally and to the wider
academic community working in areas such as
fusion energy and astrophysics. Meanwhile, at
Serco’s strategic partnership with Dstl, further
target service options such as procurement
have been added to the existing prime contract.
In our support services for the Armed Forces,
Serco extended and then subsequently
rebid successfully its Multi-Engine Pilot
Training contract at RAF Cranwell, valued at
approximately £36m over five years. Serco
provides up to 5,500 flying hours annually
in the King Air B200 aircraft, as well as up to
2,700 aircraft simulator hours. Other extended
contracts included maintenance for the Search
and Rescue fleet of Sea King aircraft, our
Multi-Activity Contract at RAF Brize Norton
and our Air Traffic Services at Wattisham, for the
British Army’s Apache helicopter fleet. In related
services for the private sector, Serco has rebid
and expanded its services to Airbus for air traffic
control, manoeuvring area safety training, air
traffic engineering and facilities management
services. We also successfully rebid our support
to the United States Air Force in Europe, which
provides transportation, supply and facilities
management. For the British Army, our pre-
deployment training Contemporary Operating
Environment Force contract was extended for
a further year.
Operations in Europe have similarly been
successfully rebid during 2013. Serco
will continue to manage the European
Space Agency’s operational control centre
infrastructure and tracking stations network,
under a five-year contract worth over €30m.
We rebid our contract providing telephony,
videoconferencing and cabling support across
European Parliament sites, and expanded it
further to cover TV distribution, in a new contract
valued at approximately €17m over a maximum
of six years.
Home Affairs
Operations across the Home Affairs market
accounted for approximately 20% of UK &
Europe Adjusted revenue.
During the year a detailed independent forensic
audit of our Electronic Monitoring (EM) contract
was completed with Serco’s full cooperation,
with the audit identifying issues with billing.
A settlement of £64.3m with the MoJ reflected
the difference in contract interpretation
From left:
Our Defence Business Services contract for the
Ministry of Defence was our first pure back-office
contract in the UK public sector.
Our joint venture continues to achieve strong
operational performance and programme delivery
at the Atomic Weapons Establishment.
27
Strategic Report Divisional reviews
UK & Europe
Continued
regarding the billing arrangements since
2005, together with a repayment of past profit
earned on the contract, interest and the UK
Government’s costs of the audits and reviews.
The difference in contract interpretation led
to instances of daily charges being applied
when there was an open Court Order but
where no active monitoring was taking place.
The settlement was full and final in respect
of contractual claims, with the proviso that
additional payments might be sought in limited
circumstances, such as if criminality were to be
established. Serco continues to cooperate fully
with the ongoing investigations by the Serious
Fraud Office. The settlement was included as
an exceptional cost in the year. The EM contract
underwent an accelerated transition to the new
service provider, with the associated costs of this
reflected within management’s estimate of other
costs in relation to the UK Government reviews.
A second significant contract issue also arose
during the year. Serco and the MoJ jointly
referred misreporting of data on the Prisoner
Escort & Custody Services (PECS) contract to
the City of London Police. Under the contract,
Serco is required to deliver defendants to
Court with performance measured against
the defendant being ‘Designated Ready and
Available for Court Time’ (DRACT). Serco
identified misreporting of DRACT data locally,
such that performance reported to the customer
was overstated. A settlement of £2.0m was
reached in repayment of profit earned since
the contract was renewed in 2011; this was
included as an exceptional cost in the year.
Significant cost was incurred to deliver service
improvements that enabled the MoJ to confirm
that Serco could retain this contract whilst
forgoing any future profits; this cost is included
within management’s estimate of other indirect
costs in relation to the UK Government reviews.
Separate audits of all of our MoJ contracts,
as well as the Cabinet Office’s wider review
across the range of our other major UK Central
Government contracts, concluded in December
2013. Beyond the EM and PECS contracts,
no further material issues were raised.
Within our custodial operations, at HMP
Thameside, Her Majesty’s Chief Inspector
of Prisons and more recently the Independent
Monitoring Board have recognised the
progress that has been made since the prison
first opened, which has included a number
of health and welfare initiatives to improve
operational performance at this new London
prison. Supporting the MoJ’s programme
to modernise the UK prison estate, we are
increasing the capacity of HMP Thameside
with a contract expansion valued at £120m
over 22 years, which includes a £36m 18-month
construction phase. During the year, Serco
transitioned HMP & YOI Ashfield from being
a Young Offender Institution to being an Adult
Male prison. At HMP & YOI Doncaster, our
payment by results pilot programme saw
significant improvement in reoffending rates for
prisoners serving less than 12 months; this work
and our London Community Payback contract
will conclude by the end of 2014, in order
for them to be rolled into the Government’s
new Transforming Rehabilitation programme,
where Serco will look at opportunities to support
others in the development of the new probation
services market.
As reported by the National Audit Office in January
2014, our contract under the Home Office’s
COMPASS programme to provide accommodation
and support services to almost 10,000 asylum
applicants in the North West of England and in
Scotland and Northern Ireland, has experienced a
challenging transition since taking over the service
in late 2012. Whilst the report recognised that
Serco had worked hard to raise standards, there
remains scope for further improvement and we
are committed to working with our customer and
our partners in local government, the NHS and the
voluntary sector to achieve that.
At HMP Thameside, we are supporting the
Ministry of Justice’s programme to modernise
the UK prison estate.
28
Serco Group plc | Annual report and accounts 2013Strategic Report
In the welfare market, Government statistics
for the Work Programme show that the national
picture is improving and that Serco continues
to achieve good results in its two contracts.
To date, we have helped 20,000 long-term
unemployed people into employment across
the South Yorkshire and West Midlands regions.
The NCS Network, a partnership of Serco,
Catch22, the National Youth Agency, UK Youth
and vInspired, is delivering the National Citizen
Service across six regions in the UK. More
than 10,000 young people have completed the
programme in the first year, gaining skills useful
for their future working lives.
Health
Operations across Health accounted
for approximately 10% of UK & Europe
Adjusted revenue.
Core to our strategy in the UK is providing
healthcare organisations with integrated
facilities management. For example, Serco
signed an extension to continue providing
support services to Plymouth Hospitals NHS
Trust, valued at approximately £40m over three
years. Our UK skills and capabilities in this
sector have also continued to be important
references for contracts won in other regions.
Operations at certain clinical health contracts
have proven challenging in 2013. Our
management of Braintree Hospital has been
impacted by lower levels of patient referrals
than predicted, with Serco’s ability to improve
utilisation of the hospital being limited. At our
Cornwall GP out-of-hours contract, overall
patient feedback is positive and the Care Quality
Commission’s report noted the improvements
made and that essential standards of quality
and safety were being fully met. However, the
implementation of the NHS Pathways IT system
during the year proved an additional challenge
for a contract that Serco has acknowledged
publicly that it has not delivered as successfully
as it should have. As announced in December
2013, Serco will end these two contracts early.
Serco began a significant new contract for the
NHS in Suffolk in October 2012, providing a
wide range of community health services. The
contract is one of the first of its kind and runs
for three years. Serco has delivered some early
benefits in 2013, such as reducing the length
of stay in community hospitals by around a
week and improving access to the service by
establishing a 24-hour care coordination centre.
However, demand on the service has increased
and it is taking longer than anticipated to bring
about the operational performance levels that
are expected. At all times Serco has ensured
that the service is properly resourced to deliver
a safe, quality service and will continue to do
so. Serco remains committed to the community
healthcare market and to the service in Suffolk.
Provisions for estimated losses in future years
on the Suffolk and Cornwall contracts, together
with provisions against the underlying assets
of the Braintree contract, led to a non-cash
exceptional charge of £17.6m in the year.
UK & Europe – future developments
The 2014 financial year will be impacted by
a greater level of attrition, which includes the
ending of contracts such as the Electronic
Monitoring service and the anticipated transition
of the management and operation of the
UK’s National Physical Laboratory. These two
significant contracts together have previously
accounted for around 5% of divisional revenue.
The overall level of attrition is expected to have
a greater impact on profitability. A reduced
level of project-related work is also anticipated
compared to 2013.
Over the next two years, significant
Serco contracts that require extending
or rebidding include:
●●● Northern Rail, where the existing contract
is due to expire in April 2014 and revenue
in 2013 was approximately 13% of the UK
& Europe division; Serco is in advanced
stages of agreeing an extension to continue
operations through to early 2016, at which
point the franchise would be retendered
●●● Docklands Light Railway, where the existing
contract is due to expire in September 2014
and revenue in 2013 was approximately
3-4% of the UK & Europe division; Serco
is currently one of three shortlisted parties
bidding for the next contract
Future growth is expected to be driven by
competitive outsourcing continuing to support
the UK Government’s aim of achieving savings,
whilst improving services and social outcomes.
The reform of public services provision is an
ongoing process, with the Cabinet Office and
spending departments continuing to bring
new opportunities to market. Bids and market
development in other areas continue to be
pursued, including direct services for local
government, non-clinical and community
healthcare services, and other frontline support
to organisations in the UK and Europe. In
addition, middle and back office opportunities
for local and central government will be
pursued, in conjunction with the skills and
capabilities of our Global Services division.
New bid opportunities that are expected to be
decided over the next two years include:
●●● Strategic partner to the MoD to deliver further
efficiencies to the Defence Infrastructure
Organisation
●●● Management of decommissioning activities
at 12 UK nuclear sites, in partnership with
CH2M HILL and AREVA
●●● Operational and engineering support for
the Defence Fire and Risk Management
Organisation
●●● Transport operations including the
Caledonian Sleeper rail service and Clyde
& Hebrides ferry services
●●● Operational support for Programme
GATEWAY at RAF Brize Norton
●●● Engineering and support services to UK
military air traffic management
●●● Non-clinical health support services to
an NHS trust
●●● Numerous environmental and integrated
waste management services for local councils
As previously noted, from 2014 the
operations of this division will split into two,
with a separate division for our UK Central
Government work to achieve a focus on
government as a collective customer.
From left:
Our community health services contract in Suffolk
is one of the first of its kind.
Serco continues to deliver good results in its two
Work Programme contracts.
29
Strategic Report Divisional reviews
Americas
Our Americas division provides
professional, technology and
management services focused
primarily on the US Federal
Government, including every
branch of the military, a broad
range of civilian agencies and the
national intelligence community.
We also provide services to
the Canadian Government,
and selected US state and
municipal governments.
For nearly two decades, Serco has served as
one of the largest systems engineering and
technical assistance contractors in US Air Force
Space Command, supporting a wide range
of military satellite systems, missile defence
systems, command and control systems, and
mission essential networks and IT systems
worldwide. We install and test communications
and data networking systems for shore, ship
and submarine installations for the US Navy.
We also assist a major intelligence agency
to acquire next generation IT systems.
Serco provides personnel and family support
services to over two million military personnel
and their families. Serco has processed and
assigned appropriate US and international
classifications for over 2.3 million US patent
applications. In 2013, we implemented the
Cooperative Patent Classification system,
a global classification system for patent
documents. We manage air traffic control
services at 64 towers across the US, ensuring
the safe transport of nearly nine million
commercial aircraft passengers a year.
Under our contract with the Virginia Department
of Transportation, we are integrating and
operating the State’s five transportation
operation centres. Serco has responsibility
for managing the services of the Safety Service
Patrol Operations, Transportation Operations
Centres, Floor Operations and ITS Maintenance,
overseeing 57,000 miles of roadway.
Through a new Department of Health and
Human Services contract, Serco supports the
US Federal Government’s newly created health
benefit exchanges. We manage over 3,500 staff,
who provide the routing, processing, reviewing
and troubleshooting of applications. Serco also
designed and implemented the technology
infrastructure and workflow management
system that support this work.
In Canada, we provide driver examination
services at approximately 100 locations across
Ontario, and provide complete base operations
services, including facilities maintenance,
fire protection, and air traffic control, at the
Canadian Air Force base in Goose Bay.
Americas – 2013 review
Adjusted revenue from ongoing activities
on a reported currency basis grew by 1%
to £765m (2012: £753m) and represented
15% of the Group (2012: 16%). On a constant
currency basis, before the effect of a marginal
strengthening of the average US dollar
rate, organic growth held steady. Adjusted
operating profit from ongoing activities
grew by 7% on a reported currency basis
to £58.8m (2012: £55.2m), with the margin
increasing to 7.7% (2012: 7.3%).
Challenging conditions have continued for
US federal contractors. During 2013, both the
Department of Defense and civilian agencies
had to implement automatic spending cuts
known as ‘sequestration’. Failure to reach
From left:
Serco delivers all non-military services at the
Goose Bay Canadian Armed Forces Base.
We provide personnel and career transition support
to US soldiers and their families.
30
Serco Group plc | Annual report and accounts 2013Strategic ReportFrom left: Lorem ipsum dolor sit amet, consecte tuer adipis cing sert elit. Prae sent viverra ullam corper leoert, susert pen disse potenti. Duis vitae mi vitae enim aliquam blandit. Ut risus nunc, ullamcorper id, commodo at eleifend sit neque. Donec sapien ipsum lacinia quis facilisis sed. From left:
We oversee driver knowledge and road tests across
Ontario, Canada.
Serco produces deployable medical systems for
global disaster relief operations.
31
Strategic Report Divisional reviews
Americas
Continued
a budget agreement resulted in a US Federal
Government shutdown lasting several weeks
in October. Additionally, ‘small business set
asides’ have restricted our ability to compete
as the prime contractor in some cases,
and government emphasis on lowest price
solutions versus best value has remained
a significant pressure.
In the third year of a US federal contracting
market reducing in size, Serco’s performance
of holding organic revenue steady was a good
outcome. Growth was achieved in the second
half of the year through the start of major new
contracts for the United States Department
of Health and Human Services’ Centers for
Medicare & Medicaid Services (CMS) and
Virginia Department of Transportation (VDOT).
The increase in margin includes the benefit of
higher margin project work performed during
the year, further cost reduction activity and
a leverage effect of returning back to growth
in the second half of 2013.
Reflecting a significant development in our
strategy to broaden the Americas portfolio,
Serco was awarded a major new contract
by CMS. Since July 2013, Serco has been
providing processing support for applications
submitted for enrolment into a Qualified
Health Plan and for insurance affordability
programmes. The contract had an initial
one-year base period valued at approximately
US$115m with four one-year options, with a
potential total contract value of approximately
US$1.25bn, including all option periods and
optional tasks. Following a modification to the
contract, the value has increased to US$202m
in the first year. Serco has set up four facilities
and hired over 3,000 staff and subcontractors,
who are processing paper applications and
working with consumers seeking healthcare
coverage through the federally-facilitated
marketplace. Future operational levels will be
dependent on funding and policy development
of the Affordable Care Act, which legislated
for the development of the services Serco
is supporting.
Serco was awarded a new contract for the
VDOT, with this further significant portfolio
development building on the skills and
capabilities that we deliver in other parts of the
Group around the world. Serco is integrating
and operating VDOT’s transportation operations
centres, managing the Safety Service Patrol,
and implementing a state-wide advanced
traffic management system that oversees
57,000 miles of roadway. The contract has
a six-year base period valued at US$355m
and three two-year option periods. Also in the
transportation market, Serco successfully rebid
its Driver Examination Services contract for the
Ontario Ministry of Transportation in Canada.
Serco is providing these vital services as
part of a ten-year partnership, with estimated
revenue to Serco of approximately C$500m
over the contract term. Serco is responsible for
overseeing approximately 575,000 knowledge
tests and 675,000 road tests annually, at 95
testing centres across Ontario, and the new
contract is expanded to include upgrading and
enhancing information technology solutions.
Existing Sea Enterprise and HRsolutions IDIQ
frameworks generated wins, modifications and
extensions worth US$139m during the year.
This includes integrating and upgrading IT
systems for the US Navy and human resource
services for the US Army. Task orders valued
at US$22m were awarded under the Alliant IDIQ,
through which Serco provides a full range of
integrated information technology solutions to
federal civilian agencies and the Department
of Defense. Serco is the sole provider on the
C4I2TSR IDIQ, which supports the US Air Force
Space Command’s command and control
systems, with this generating task orders
valued at US$25m in 2013. Serco also provides
systems engineering and technical assistance
From left:
We process documents to assist US consumers
seeking federally facilitated healthcare coverage.
Serco utilises logistics supply operations to keep
US Navy assets mission-capable.
32
Serco Group plc | Annual report and accounts 2013Strategic Report In Virginia, Serco operates transportation operation centres,
manages the road-side Safety Service Patrol and is developing
a single advanced, stateside solution that oversees 57,000
miles of roadway.
to the US intelligence community, and signed
a five-year extension to one of its contracts,
valued at approximately US$40m.
Americas – future developments
The 2014 financial year will be impacted by
the ending of certain areas of work for the US
Federal Retirement Thrift Investment Board,
the Department of Veteran Affairs and the US
Army. Together, these contracts have previously
accounted for around 8% of divisional revenue
and a greater proportion of profits. The level of
higher margin project work experienced in 2013
is not expected to repeat. The annualisation
of the CMS and VDOT new contract awards
should substantially offset the revenue impact.
Over the next two years, significant Serco contracts
that require extending or rebidding include:
National Visa Center and Kentucky Consular
Center, where the contracts are now
expected to be extended to January 2015
and revenue in 2013 was approximately
5% of the Americas division
organisational structure and adjusted growth
investment to support its strategy going forward.
New bid opportunities that are expected to be
decided over the next two years include:
●●● C4I2TSR services for the US Air Force, where
the existing IDIQ contract vehicle is due to
expire in 2014 and revenue in 2013 was
approximately 4% of the Americas division
●●● A significant number of task orders under
the Sea Enterprise IDIQ, for US Navy
network services
Future growth within the federal government
services market will continue to be a challenge
in the short term. While the US Federal
Government is funded through to September
2014, questions still remain on what the
overall impact will be on specific programmes
and contracts. In the longer term, the market
remains attractive in size and growth.
●●● IT support services for a US intelligence
agency, where the existing contracts expire
at various points in 2014 and revenue in
2013 was approximately 9% of the Americas
division
●●● Contracts for the US Department of
Homeland Security supporting the United
States Citizenship and Immigration Services,
where the contracts are due to expire in
November and December 2014 and revenue
in 2013 was approximately 5% of the
Americas division
●●● Support to the Department of State’s
Following the progress in 2013 in broadening
the Americas portfolio within sectors where
Serco has strong global capabilities, we
continue to pursue opportunities in our
established core market segments, which
include: acquisition and programme
management; defence readiness; aviation
and air traffic management; C4ISR;
citizen services; and facilities and asset
management. We will pursue further growth
opportunities in government health services
and other healthcare support, and in surface
transportation. With this market segment
approach to growing the business, the
Americas division has recently realigned its
●●● Data capture, processing and document
management for the US Patent & Trademark
Office
●●● Processing and case management
for the Department of State Passport
Support Services
●●● Expanded IT and support services for the
US intelligence community
●●● Management of state transportation
operations centres
●●● Support to state-based exchanges for
health insurance
From left:
Serco manages airport traffic control towers across
North America, to ensure the safety of our skies.
We maintain satellite communication systems for the
US Air Force, to ensure data sharing around the world.
33
Strategic Report Divisional reviews
AMEAA
AMEAA consists of Australasia,
the Middle East, Asia and Africa,
where we provide services
including transport, justice,
immigration, health, defence
and other direct services such
as facilities management.
In Australia, Serco offers systems integration
and complex project management, as a key
provider for the Australian Defence Force. Our
marine arm, DMS Maritime, makes us one of
the country’s largest marine services providers.
Our work in justice and corrections, focused
on reducing reoffending, was again publicly
recognised by further awards in 2013. In health,
we have taken over responsibility for Western
Australia’s flagship Fiona Stanley hospital site,
where we are integrating facilities management
and support services. We also provide medical
logistic services to the military. We operate the
national network of immigration centres for
the Australian Department of Immigration and
Border Protection. In transport, our services
range from operating customer services and
processing information to developing and
maintaining infrastructure. Serco also owns
Great Southern Rail, which operates Australia’s
iconic trains, the Indian Pacific and the Ghan.
In New Zealand, we manage Mt Eden
Corrections Facility, which is currently the
country’s only privately operated prison, and are
part of the consortium which is building and will
operate the new prison at Wiri, South Auckland,
under a public-private partnership.
In Hong Kong, we are the market leader
in managing, operating and maintaining
road tunnels, bridges and related tollway
infrastructure. We provide domestic and
transportation services to two major hospitals,
and in 2013 we commenced our first contract
to provide road and parking facilities
management services at the Hong Kong
International Airport.
The Middle East is home to some of Serco’s
longest standing air traffic control contracts.
We are also the region’s largest international
operator in urban surface transport. Most
notably, we operate the Dubai Metro, the
world’s longest and most-advanced driverless
light rail system. Our technology business
serves the telecommunications, marine and
biomedical sectors, and we provide integrated
facilities management to the education and
commercial sectors.
In India, Serco operates and maintains the
new Bus Rapid Transit System, in the city of
Indore in the state of Madhya Pradesh. We
have implemented a pilot project for electronic
road toll collection with ICICI Bank, intended to
pave the way for a long-term partnership and
nationwide implementation.
AMEAA – 2013 review
Adjusted revenue from ongoing activities on
a reported currency basis grew by 19% to
£1,050m (2012: £883m), and represented
21% of the Group (2012: 18%). On a constant
currency basis, before the effect of local
currency weakness against the average
sterling rate, growth was 22%. Excluding the
contribution from the prior year’s acquisition
of the remaining 50% equity stake in DMS
Maritime, organic growth was 18%. A significant
From left:
During 2013, management of the Fiona Stanley hospital
site passed to Serco. By early 2015, we will be managing
more than 1,000 non-clinical staff at the hospital.
Our work in justice and corrections was again publicly
recognised by awards in Australia in 2013.
34
Serco Group plc | Annual report and accounts 2013Strategic Report From left:
Our portfolio of air traffic control contracts
includes Baghdad International Airport, Iraq.
We are one of Australia’s largest marine
services providers.
35
Strategic Report Divisional reviews
AMEAA
Continued
proportion of this was due to the volume of our
work providing immigration services in Australia,
with other incremental revenue coming from
growing our transport and health operations
in the wider AMEAA region.
Adjusted operating profit from ongoing activities
grew by 28% on a reported currency basis
to £82.1m (2012: £64.3m), with the margin
increasing to 7.8% (2012: 7.3%). The increased
margin reflects principally the beneficial effect of
operational leverage, particularly in immigration
services, and other cost management activity
undertaken in the period.
In Immigration Services in Australia, a record
number of people arrived by boat without a
valid visa; over 20,000 individuals arrived in this
manner in 2013 and the number of people in
our care averaged 7,400. This increased the
volume of work carried out under contracts
Serco has for the management and operation of
the detention services and the related transport
arrangements. This resulted in further growth
in revenue to over £450m for the Group in
2013, and the employment of more than 3,000
people across Australia. Following significant
changes to government policies, the population
in our care declined to below 5,000 by the end
of February 2014. A six month extension to
10 December 2014 was awarded for our main
contract for the detention centres.
In justice services, operational improvements at
Mt Eden Corrections Facility have continued to
be recognised. A new performance grading of all
prisons in New Zealand has placed Mt Eden in
the ‘exceeding’ category. In Australia, Southern
Queensland Correctional Centre was honoured
with a prestigious Australian Business Award in the
Innovation category, recognising a ground-breaking
education project being trialled at the prison, with
the ultimate aim of reducing reoffending.
Serco’s pre-operational support for the Fiona
Stanley hospital in Perth continued to build over
2013 and management of the site transferred to
Serco in December. The hospital is the largest
public tertiary health facility in Western Australia,
with Serco providing an extensive range of
facilities management and support services.
The first patients will be admitted in October
2014 and by early 2015 Serco will be managing
more than 1,000 non-clinical staff required to
operate the hospital.
Serco’s presence in the health market
elsewhere in the AMEAA region is developing
well. Serco was awarded a new healthcare
support services contract in the Middle East at
Healthpoint in Abu Dhabi. Healthpoint is a fully
integrated, primary care and multi-specialty
hospital, offering a wide range of outpatient
and inpatient services. In Hong Kong, where
we currently employ more than 600 people
in health-related businesses, we extended
our facilities management services contract,
covering four hospitals and one rehabilitation
centre in the western districts.
Also in Hong Kong, Serco was awarded a new
transportation management, operation and
maintenance contract for the Tsing Sha Control
Area, with a total estimated value to Serco
of HK$960m (approximately £80m) over the
six-year base period. Our extensive air traffic
control services in the region, while no longer
serving Abu Dhabi, were strengthened with a
new 18-month, £24m contract for the Iraq Civil
Aviation Authority and a new framework contract
for the Qatar Civil Aviation Authority.
During the year, Serco signed an extension to
its contract with the Dubai Government Roads
and Transport Authority (RTA) to operate and
maintain the Dubai Metro. Serco has continued
to deliver world class safety and operational
standards, including 99.9% of trains on time,
while also expanding ridership to over 137
million journeys in 2013. The five-year extension
is valued at approximately £355m, with an
From left:
Serco operates the Dubai Metro, the world’s longest
and most-advanced driverless light rail system.
We manage Mt Eden Corrections Facility, which is
currently New Zealand’s only privately operated prison.
36
Serco Group plc | Annual report and accounts 2013Strategic Report At HMAS Watson in Sydney, Australia, we apply the highest
standards of engineering, software development and technical
skills to simulator-based maritime warfare training.
opportunity to extend for a further two years to
2021. Also for the RTA, Serco signed a contract
for the new Dubai Tramway, valued at £18m
over five years. Further extending our range of
services in the region, a six-year contract valued
at approximately £30m was awarded to provide
facilities management services in the United
Arab Emirates, and a contract for employment
support and training services was awarded in
the Kingdom of Saudi Arabia.
In defence services, Serco extended and
expanded its contract with the Australian
Defence Force (ADF) to provide logistics and
base support services in the Middle East.
Valued at approximately £18m for a further
year, we continue to deliver fully integrated
support for ADF bases, to ensure the provision
of high-quality services in areas such as
maintenance and accommodation, and will
also assist through a complex programme
of demobilisation from Afghanistan. We also
secured our first direct contract to provide
training services in the Middle East defence
market in the period.
AMEAA – future developments
The 2014 financial year is expected to be
significantly impacted by reduced activity levels
for Serco’s Immigration Services in Australia.
Activity levels have proven unpredictable in
the past due to a number of factors; however,
they have fallen following recent changes
in government policy and we estimate that
the contract could reduce by as much as
50% in 2014. As the Group’s single largest
operation, accounting for around 9% of Group
revenue, and achieving a margin reflecting the
complexity of the services involved, this is the
single largest factor underlying the Group’s
anticipated reduction in financial performance
for 2014. Having secured an extension through
to December 2014, the operations are then
subject to rebid.
Over the next two years the only other
significant rebid in the AMEAA division relates
to our various Australian regional defence
garrison support services contracts, operated in
partnership with Sodexo. These have accounted
for approximately 8% of revenue of the AMEAA
division, are due to expire in June 2014 and are
under evaluation currently.
There remain significant market opportunities
to achieve further growth in the AMEAA region.
These include: the justice market in Australia
and New Zealand; non-clinical healthcare
support services across the region; defence
support services; and transport operations
including the rail, bus and aviation sectors.
Serco has strong skills and capabilities in
each of these operational areas within the
AMEAA region, and the ability to leverage
referenceability from across the Group.
New bid opportunities that are expected to be
decided over the next two years include:
●●● A new-build prison design, construct and
operate contract in Victoria, Australia, with
Serco’s SecurePathways consortium one
of two shortlisted
●●● Service operation of the Sydney North West
Rail link, with Serco’s TransForm consortium
one of two shortlisted for the proposed new
rapid transport system
●●● Operation and maintenance of public bus
services in Bahrain
●●● Oman air navigation services
●●● Traffic management services in Abu Dhabi
●●● Further support and operation of metro
systems in the region, including the
Sydney Light Rail project, with Serco’s
SydneyConnect consortium one of three
shortlisted
●●● Non-clinical support services to health
organisations in the Middle East
From left:
We operate and manage parking meters for
18,000 street parking spaces in Hong Kong.
Serco owns Great Southern Rail, which operates
Australia’s iconic trains, the Indian Pacific and
the Ghan.
37
Strategic Report Divisional reviews
Global Services
Global Services brings together
our customer contact, middle
and back office skills, allowing
us to provide broad end-to-end
BPO services to public and
private sector customers.
Our combination of our BPO
expertise and frontline services
sets us apart from other providers.
Global Services operates in more than 100
locations across 13 countries and employs
60,000 people. Worldwide, we conduct more
than 90 million multi-channel interactions in
20 languages each year, as well as 600 million
calls and 60 million back office transactions.
Our widespread presence allows our customers
to choose the onshore, nearshore or offshore
delivery location that best matches their skill
and cost requirements.
We offer three lines of service: business
process outsourcing (BPO), consulting and
technology services. Our specialist teams
address customers’ needs across functions,
including HR, finance and accounting,
procurement, customer services management
and consulting. We provide advisory, design
and delivery expertise in the areas of operations
strategy, transformation, programme delivery,
outsourcing, people performance and selection,
change management and research. We are also
experts in handling large workforce transfers
and managing confidential data.
Our solutions are industry-specific, for
customers in Banking & Financial Services,
Insurance, Retail, Travel, Telecoms, Utilities,
Healthcare and the public sector. We build
customised solutions assisted by industry
experts, whether our customer is a bank looking
to improve the quality of its mortgage portfolio,
a city council with a need to transform its local
services or an airline wanting to reduce its costs.
Global Services – 2013 review
Adjusted revenue from ongoing activities on a
reported currency basis grew by 10% to £772m
(2012: £702m), and represented 15% of the
Group (2012: 15%). On a constant currency
basis, before the effect of local currency
weakness against the average sterling rate,
growth was 12%. Excluding the contribution
from the prior year’s Vertex acquisition, organic
growth was 5%. Adjusted operating profit from
ongoing operations on a reported currency
basis declined by 35% to £39.9m (2012:
£61.3m), with the margin declining to 5.2%
(2012: 8.7%). Including the impact of disposals,
Adjusted revenue on a reported currency basis
increased by 8% to £772m (2012: £716m) and
Adjusted operating profit declined by 36% to
£39.9m (2012: £62.1m).
The major contract awards that began in the
second half of 2012, including Shop Direct and
AEGON UK, helped to drive strong revenue
growth in the first half of 2013. However,
performance weakened in the second half of
the year. There was less success in winning
new contract awards, and there was a lower
level of UK Central Government discretionary
and ad hoc project work. The significant margin
reduction reflected increased costs of contract
bidding and new market development activity,
the reduced level of typically higher margin
project work and the transitional stage of the
major new contracts, which tend to involve
greater upfront investment.
Global Services operates in more than 100 locations
and employs 60,000 people.
38
Serco Group plc | Annual report and accounts 2013Strategic Report Worldwide, Global Services conducts more than
90 million multi-channel interactions in 20 languages
each year.
39
Strategic Report Divisional reviews
Global Services
Continued
In our first full year of providing all customer
contact services across Shop Direct’s brands,
we have delivered our transformation plan
for the rationalisation of UK operations, the
delivery of new digital services from our
centre in Cardiff and the establishment of
offshore and nearshore locations in India and
South Africa. This has included the transfer
of around 2,000 Shop Direct employees to
Serco, the introduction of three new sites and
the closure of two legacy sites. Similarly with
the transformation programme at AEGON UK,
during our first year of operation we have
successfully transitioned over 300 staff
to Serco and have around 500,000 polices
under management.
New contract awards in the year for private
sector customers included providing a range
of BPO services such as sales and payments
collection for a further leading UK high street
retailer. The adoption of an integrated contact
centre approach saw Serco transition customer
services to our centre in Sheffield, as part of
a ten-year contract worth approximately
£50m. Of particular importance are Serco’s
capabilities in multi-channel contact, with
specific developments for those customers
who are using tablet or mobile devices for their
shopping and account management needs.
At the Anglia Support Partnership (ASP),
where we provide shared service support
to NHS organisations, we have continued to
see expansion of our platform and framework
contract. A further contract was signed with a
large NHS hospital trust, to provide strategic
procurement and finance and accounting
services, involving the transfer of the trust’s
systems to the ASP shared service platform.
The four-year contract is expected to generate
revenue of approximately £112m.
Serco secured extensions in the year for
a number of UK Central Government BPO
contracts valued at over £100m in total, with
an average extension period of three years.
The contracts include the provision of specialist
complex case management services for the
Child Maintenance Group at the Department for
Work & Pensions (DWP), managing enquiries
on behalf of Jobcentre Plus and the Universities
& Colleges Admissions Service, supporting the
delivery of the Department of Health’s ‘Healthy
Start’ programme and operating the Food
Standards Agency’s emergency helpline.
For our Child Maintenance Group operations,
Serco won the ‘Value for Money Award’ at
the DWP Supplier Excellence Awards 2013,
recognising our continuous improvement
ethos and innovative approaches to enhancing
customer experience, whilst driving down costs
for the DWP.
In our local authority strategic partnerships,
at Hertfordshire County Council we continue
to transform the way services are delivered.
Expanded services have included a pioneering
new telecare service for adults in receipt of
social care. With an initial value of £12m over
five years, there is potential for further growth
as the service is extended to provide wider
support. At Thurrock, Serco has introduced
a new debt collection programme and
is providing additional ICT support, as part of
the council’s wider transformation programme.
In an important development in our Middle
East operations, Serco was awarded a
new contract for shared services to over 50
government departments within the United
Arab Emirates. Serco will initially provide citizen
contact and issue resolution management
regarding the supply of public services, with
potential for the scope of the contract to be
increased in the future to include other back
office processing. Contact will be delivered on
a unique multi-channel basis, including voice,
email and web chat. As per the agreement, the
contract will provide employment opportunity
We secured extensions for a number of UK Central
Government BPO contracts in 2013, valued at over
£100 million in total.
40
Serco Group plc | Annual report and accounts 2013Strategic Report Serco is now the sole contact centre service provider for India’s
largest public sector bank.
to only Middle Eastern nationals. The initial
four-year contract is estimated to be valued
at approximately £24m.
In India’s banking and financial services market,
Serco is now the sole contact centre service
provider for the country’s largest public sector
bank. For India’s largest private sector bank,
additional work awarded has led to Serco now
supporting more than 75% of the collections
services and becoming the largest supplier
supporting card issuance on behalf of the bank.
Expanding our support to the Indian public
sector, we were awarded a customer support
contract for energy services in the state of
Punjab. Amongst other rebids and contracts
won, we successfully rebid a contract valued
at approximately £14m, supporting a leading
US credit bureau with customer services for
mortgage-related queries.
Our network of BPO delivery centres saw, during
2013, the opening of our first centre in Cape
Town, South Africa, to service both international
and domestic customers. The opening of our
centre in Teltow, Germany, is supporting major
European customers such as Sky Deutschland.
Meanwhile our workforce in Cardiff, where we
support multi-channel customer contact for
a number of well-known UK retail brands,
has almost doubled in size.
Global Services – future developments
In the 2014 financial year, no significant attrition
is anticipated from the ending of any individual
contracts. Over the next two years there are also
no significant contracts that require extending
or rebidding. There are, however, ongoing
pressures from terms renegotiations with
existing customers, some reductions in activity
levels as we move beyond the transition phases
on previous major contract starts, and the need
to rebuild the pipeline, particularly after the
lower level of contract awards in the second
half of 2013, in part as a result of the UK
Government issues.
Serco has important capabilities to offer in the
attractive BPO market, with scale and depth to
provide private and public sector customers
with a range of end-to-end, integrated business
services, as they seek to reduce costs and
improve efficiencies by transforming their
operations. In particular, Serco has strength
in offering a blend of onshore, nearshore
and offshore service provision. We also
have excellent capabilities in areas such
as multi-channel customer contact services.
For the private sector, the Global Services
division has added to and expanded the scope
of existing customer relationships over time,
and sees further potential to continue growing
in this manner in the future. Referenceability and
prospects are spread across large and diverse
industry groups: Banking, Financial Services &
Insurance; Travel, Hospitality & Transportation;
Retail, Healthcare, Utilities & Manufacturing;
and Telecom, Technology, Online Services &
Media. With significant presence to build from
in the UK and India domestic markets, we are
also continuing to target opportunities in other
geographies.
For the public sector, the Global Services
division is working alongside the regional
divisions in order to bid and deliver fully
integrated solutions for their customers. The
division provides bid support in areas relating
to contact centre services, case management,
identity verification, transaction processing,
ICT, human resources and payroll, finance
and accounting, and any other middle or back
office support function that is required. Central
Government is expected to continue to develop
opportunities for shared service centre support.
UK strategic partnerships with local authorities
to transform their services should also further
develop as a market, with increasing potential
to outsource non-core supporting operations.
Expanding existing local authority relationships
remains a key source of future growth,
as does further developing the ASP shared
service centre for the NHS and other
health organisations.
Recognition of Serco’s growing presence in the
BPO market continues to build. For example,
we have risen into the top three UK business
process services providers, as compiled by
leading software and IT services industry
research company TechMarketView, in its 2013
UK Software and IT Services Rankings report.
In a separate recent report regarding the
public sector, TechMarketView acknowledged
Serco’s progress in transitioning from a pure IT
outsourcer to a BPO player, using technology
to support innovation and transformation in
the front and back office. We have also been
recognised as a top tier BPO service provider
by industry analysts and third party advisors
such as Gartner, Everest, NelsonHall and HFS.
New bid opportunities that are expected to be
decided over the next two years include:
●●● European telecom operator customer
contact services and digitisation
●●● Expanded existing and new operations for
life and pensions companies
●●● Retail multi-channel customer management
services
●●● Lincolnshire County Council BPO support,
covering finance, HR, ICT and citizen contact
●●● Further local authority opportunities, covering
similar services
41
Strategic Report Finance review
Overview
Revenue grew by 5.6% to £4,288.1m and operating
profit, after exceptional items, was £143.8m (2012:
£272.2m). Adjusted revenue from ongoing activities
was £5,101.3m, a growth of 7.8% at constant
currency (5.9% organic). Adjusted operating profit
from ongoing activities was £285.4m, representing a
2.3% decline at constant currency. Adjusted operating
margin on an ongoing basis reduced to 5.6%
compared to 6.3% in 2012, a decrease of 68 basis
points (59 basis points decrease at constant
currency). Adjusted profit before tax declined by
6.3% to £254.4m (3.6% decline at constant currency).
Group free cash flow was £84.8m, which reflected
a decrease on the prior year principally as a result
of working capital impacts of timing differences
between the period when costs are incurred in
the delivery of the contract and the period when
we can contractually bill our customer, and
lower dividends from joint ventures.
For 2014, we are forecasting a mid-single
digit percentage organic revenue decline.
This reflects the lower level of incremental work
won across the Group to date, the attrition from
contracts lost such as Electronic Monitoring,
and our latest assessment of the impact of
volume reductions in our Australian immigration
detention services contract. The Adjusted
operating margin is anticipated to decline by
approximately 50 to 100 basis points. This takes
account of the margins associated with the
revenue reductions, together with the ongoing
incremental costs of the agreed corporate
renewal programme. Statutory operating profit
margins before exceptional items are expected
to decline but at a lesser rate, reflecting the
lower levels of costs and charges expected
to be incurred in relation to the impact of the
UK Government reviews, together with a lower
amount for amortisation of intangibles arising
on acquisition.
42
Andrew Jenner
Group Chief Financial Officer
Serco Group plc | Annual report and accounts 2013Strategic Report 1. Income statement
The key lines of Serco’s income statement for the year are summarised below and include analysis of revenue, operating profit, exceptional items,
profit before tax and earnings per share. In the review of the business which follows, the statutory results have been adjusted to reflect proportional
consolidation of the results of joint ventures, as these businesses form a fundamental part of the way the Group works to meet the demands of
its customers.
The tables show separately Adjusted revenue and Adjusted operating profit of ongoing activities, which exclude the financial results of subsidiaries
and operations disposed of during the year, in order to present more clearly the performance of the ongoing business. Measures of Adjusted operating
profit, Adjusted profit before tax and Adjusted earnings per share are presented to assist the reader to understand the results of the underlying
business, and reflect the measures used by senior management to assess the performance of the business. Adjusted measures are also calculated
before amortisation of intangibles arising on acquisition, transaction-related costs, exceptional items and management’s estimate of other costs
and charges relating to the impact of the UK Government reviews.
The prior year results have been restated following adoption of the revisions to IAS 19 Employee Benefits and IFRS 11 Joint Arrangements, and also
to reflect the adjustment to prior year acquisitions for provisional acquisition accounting entries. The impact of these restatements is shown in note 4
to the financial statements and has reduced reported revenue by £852.9m, profit before tax by £20.9m and profit for the year by £4.9m.
1.1 Revenue
Year ended 31 December
Adjusted revenue – ongoing activities
Adjusted revenue – disposed activities
Adjusted revenue
Less: Share of joint venture revenue
Revenue
2013
£m
5,101.3
42.6
5,143.9
(855.8)
4,288.1
2012
(restated)
£m
4,774.6
138.4
4,913.0
(852.9)
4,060.1
Change at
constant
currency
7.8%
5.7%
6.7%
Change
6.8%
4.7%
5.6%
Adjusted revenue from ongoing activities grew by 6.8% to £5,101.3m (7.8% growth at constant currency). Organic revenue, which excludes currency
effects, acquisitions and disposals, increased by 5.9%, with the drivers of this revenue performance discussed in the preceding Divisional Reviews.
Revenue for the year was up 5.6% at £4,288.1m.
1.2 Operating profit
Year ended 31 December
Adjusted operating profit – ongoing activities
Adjusted operating profit – disposed activities
Adjusted operating profit
Amortisation of intangibles arising on acquisition
Transaction-related costs
Share of joint venture tax and interest
Management estimation of charges related to UK Government reviews
Operating profit before exceptional items
Exceptional operating items
Operating profit
Adjusted operating margin – ongoing activities
Adjusted operating margin
2013
£m
285.4
6.6
292.0
(21.4)
(3.5)
(11.8)
(21.0)
234.3
(90.5)
143.8
5.59%
5.68%
2012
(restated)
£m
299.6
14.5
314.1
(24.1)
(3.7)
(14.7)
–
271.6
0.6
272.2
6.27%
6.39%
Change at
constant
currency
(2.3%)
Change
(4.7%)
(7.0%)
(4.7%)
(13.7%)
(11.2%)
(47.1%)
(68bps)
(71bps)
(44.6%)
(59bps)
(62bps)
Costs estimated and allocated by management as relating to the impact of UK Government reviews on the business are in addition to those identified
as exceptional items on the face of the income statement. Included in this amount are onerous contract charges incurred in the period on other Ministry
of Justice contracts, an estimation of the costs incurred on the Electronic Monitoring and Prisoner Escort & Custody Services (PECS) contracts relating
to supporting the review work, bid costs incurred on proposals where management believe the Cabinet Office reviews represented a significant reason
why the Group was unsuccessful, the effect of accelerated transition to a new service provider of the Electronic Monitoring contract and other specific
related costs.
Adjusted operating profit from ongoing activities decreased by 4.7% to £285.4m (2.3% decline at constant currency). This represents a margin of 5.6%,
which is a 68 basis point decrease compared with the prior year. Drivers of the margin performance are discussed in the Divisional Reviews. Operating
profit before exceptional items in the year to 31 December 2013 was £234.3m (2012: £271.6m) and operating profit, after exceptional items, was
£143.8m (2012: £272.2m).
43
Strategic Report Finance review
1.3 Reportable segments and ongoing activities
The table below shows the segmental results split between ongoing activities, being the part of the business which will continue into 2014,
and disposed activities, being the part of the business which contributed to the 2013 and 2012 results but were disposed of during either year.
Year ended 31 December 2013
Adjusted segment revenue
Ongoing activities
Disposed activities
Adjusted revenue
Adjusted operating profit
Ongoing activities
Disposed activities
Adjusted operating profit
Year ended 31 December 2012
Adjusted segment revenue
Ongoing activities
Disposed activities
Adjusted revenue
Adjusted operating profit
Ongoing activities
Disposed activities
Adjusted operating profit
UK & Europe
£m
Americas
£m
2,514.3
42.6
2,556.9
150.7
6.6
157.3
2,436.4
124.7
2,561.1
163.4
13.7
177.1
765.3
–
765.3
58.8
–
58.8
753.4
–
753.4
55.2
–
55.2
AMEAA
£m
1,049.5
–
1,049.5
82.1
–
82.1
883.0
–
883.0
64.3
–
64.3
Global
Services
£m
Corporate
£m
Total
£m
772.2
–
772.2
39.9
–
39.9
701.8
13.7
715.5
61.3
0.8
62.1
–
–
–
(46.1)
–
(46.1)
–
–
–
(44.6)
–
(44.6)
5,101.3
42.6
5,143.9
285.4
6.6
292.0
4,774.6
138.4
4,913.0
299.6
14.5
314.1
1.4 Transaction-related costs
There were £3.5m of costs arising from transaction-related activity during the year (2012: £3.7m).
1.5 Management estimation of charges related to UK Government reviews
There were £21.0m (2012: £nil) of both costs estimated and allocated by management as relating to the impact of UK Government reviews on the
business. These costs are in addition to those identified as exceptional items on the face of the income statement. Included in this amount are onerous
contract charges incurred in the period on other Ministry of Justice contracts (£6m), an estimation of the costs incurred on the Electronic Monitoring and
PECS contracts relating to supporting the review work (£2m), bid costs incurred on proposals where management consider the Cabinet Office reviews
represented a significant reason why the Group was unsuccessful (£5m), the effect of accelerated transition to a new service provider of the Electronic
Monitoring contract and other specific related costs (£8m).
1.6 Exceptional operating profit items
Year ended 31 December
Settlement relating to UK Government reviews
Costs associated with UK Government reviews
UK clinical health provisions
Restructuring costs
Asset impairment
Adjustment to deferred consideration relating to prior year acquisition
Charitable donation
Gain on disposal of UK transport maintenance business
Loss on disposal of UK occupational health business
Loss on disposal of Ascot College
Gain on disposal of nuclear consulting services business
Loss on disposal of German operation
Loss on disposal of UK data hosting operations
Loss on disposal of education software business
Net exceptional (costs)/income
44
2013
£m
(66.3)
(11.6)
(17.6)
(14.9)
(9.6)
10.3
–
23.2
(3.9)
(0.1)
–
–
–
–
(90.5)
2012
£m
–
–
–
–
–
–
(5.0)
–
–
–
57.6
(27.7)
(11.5)
(12.8)
0.6
Serco Group plc | Annual report and accounts 2013Strategic Report Settlement amounts relating to UK Government reviews
In December 2013, following a review of the billing arrangements on the Electronic Monitoring contract by the Ministry of Justice, a settlement
of £64.3m was reached in respect of the contractual claim. In addition, a £2.0m settlement was reached on the PECS contract, which was also
subject to Government review, to reflect repayment of past profit earned on this contract.
Costs associated with UK Government reviews
Since July 2013 there have been external adviser and other directly related incremental costs, including the exit costs of certain senior management,
that amounted to £11.6m.
Onerous UK clinical health provisions
During the year we completed a comprehensive review of the clinical health operations in the UK. As a result, we will exit two contracts early. These
contracts, together with a third loss-making contract, require provisions for estimated losses in future years together with a provision against underlying
assets, which in total amount to a non-cash exceptional charge of £17.6m. This has been treated as exceptional due to the non-recurring nature of the
charge and its significant value.
Restructuring
As a result of a review of the cost structures in the UK businesses, a restructuring charge of £14.9m was taken and when complete will reduce
headcount by approximately 400, split equally between UK & Europe and Global Services.
Asset impairment
As a result of a review of under-performing businesses and operations, an impairment charge of £9.6m was taken in relation to the carrying value
of fixed assets in Great Southern Railway, a rail tourism business based in Australia, reflecting more challenging conditions in that market.
Adjustment to prior year acquisition
On assessment against earn-out criteria, an adjustment was made to the accrual for deferred consideration arising on the 2011 Intelenet acquisition
of £10.3m.
Exceptional net profit on disposal of subsidiaries and operations
On 27 November 2013, the Group disposed of its UK transport maintenance and technology business for consideration of £44.9m, which resulted
in a gain of £23.2m. The disposal on 4 October 2013 of the occupational health business resulted in a loss of £3.9m.
1.7 Exceptional other gain
Year ended 31 December
Gain on step acquisition accounting of joint venture
2013
£m
–
2012
£m
51.1
The exceptional other gain in 2012 represents the non-cash gain arising from the step acquisition accounting of the DMS joint venture where the original
50% shareholding was restated to fair value.
1.8 Net finance costs
Year ended 31 December
Adjusted net finance costs
Less: Share of joint venture net interest costs
Net finance costs
2013
£m
(37.6)
0.4
(37.2)
2012
(restated)
£m
(42.5)
0.3
(42.2)
Change at
constant
currency
(11.8%)
Change
(11.5%)
(11.8%)
(12.1%)
Adjusted net finance costs decreased £4.9m to £37.6m (2012: £42.5m). The principal reason for this was the non-recurrence of additional costs in the
prior year relating to re-financing the revolving credit facility.
45
Strategic Report Finance review
1.9 Profit before tax
Year ended 31 December
Adjusted profit before tax
Amortisation of intangibles arising on acquisition
Transaction-related costs
Share of joint venture tax
Management estimation of charges related to UK Government reviews
Profit before tax and before exceptional items
Exceptional items
Profit before tax
2013
£m
254.4
(21.4)
(3.5)
(11.4)
(21.0)
197.1
(90.5)
106.6
2012
(restated)
£m
271.6
(24.1)
(3.7)
(14.4)
–
229.4
51.7
281.1
Change at
constant
currency
(3.6%)
Change
(6.3%)
(14.1%)
(11.1%)
(62.1%)
(59.7%)
Adjusted profit before tax decreased by 6.3% to £254.4m (3.6% decrease at constant currency). Profit before tax and before exceptional items was
14.1% lower than the prior year, with the reduction following the decrease in operating profits as described above. Profit before tax was £106.6m,
a reduction of 62.1% on the prior year.
1.10 Tax
Year ended 31 December
Adjusted tax
Tax on amortisation of intangibles arising on acquisition
Tax on transaction-related costs
Share of joint venture tax
Tax on management estimate of charges related to UK Government reviews
Tax before exceptional items
Tax on exceptional items
Tax
Adjusted effective tax rate
2013
£m
(61.1)
5.5
–
11.4
4.2
(40.0)
28.8
(11.2)
2012
(restated)
£m
(66.9)
5.4
0.5
14.4
–
(46.6)
6.5
(40.1)
24.0%
24.6%
Change at
constant
currency
6.0%
Change
8.7%
14.2%
10.5%
72.1%
68.2%
The Adjusted effective tax rate was 24.0% (2012: 24.6%). The movement reflects changes in the mix of taxable profits in different jurisdictions and the
reduction in the UK headline tax rate from 24% to 23% from 1 April 2013.
1.11 Earnings per share (EPS)
Year ended 31 December
Adjusted earnings per share (basic)
Amortisation of intangibles arising on acquisition
Transaction-related costs
Management estimate of charges related to UK Government reviews
Earnings per share before exceptional items (basic)
Exceptional items
Earnings per share (basic)
2013
Pence
39.53
(3.25)
(0.72)
(3.43)
32.13
(12.62)
19.51
2012
(restated)
Pence
41.55
(3.81)
(0.65)
–
37.09
11.85
48.94
Change at
constant
currency
(2.1%)
Change
(4.9%)
(13.4%)
(10.5%)
(60.1%)
(58.0%)
Adjusted EPS declined by 4.9% to 39.53p (2.1% decline excluding currency effects). EPS before exceptional items declined by 13.4% to 32.13p,
while EPS declined 60.1% to 19.51p. EPS and Adjusted EPS are calculated on a basic weighted average share base of 489.0m (2012: 491.2m).
2. Dividend
Year ended 31 December
Dividend per share
2013
Pence
10.55p
2012
Pence
10.10p
Change
4.5%
The Board has proposed a final dividend for 2013 held at 7.45p, bringing the total dividend for the year to 10.55p which is an increase of 4.5%.
This reflects our ongoing transition to a higher payout ratio. Based on Adjusted basic earnings per share of 39.53p, the dividend represents a payout
of 27% (2012: 24%), or dividend cover of 3.75x (2012: 4.11x). The Board set out in 2013 the intention to move to dividend cover of 2.5-3x over time,
beyond which point it would expect to revert to increasing the total dividend each year in line with the increase in underlying earnings. The final
dividend will be paid, subject to shareholder approval, on 14 May 2014 to shareholders on the register on 14 March 2014.
46
Serco Group plc | Annual report and accounts 2013Strategic Report 3. Cash flow
The Group generated a free cash inflow of £84.8m (2012: £181.2m), the decrease arising principally as a result of incremental working capital and lower
dividends from joint ventures.
Year ended 31 December
Adjusted operating profit excluding joint ventures
Non cash items
Adjusted EBITDA excluding joint ventures
Working capital movement
Adjusted operating cash flow excluding joint ventures
Interest
Tax
Net expenditure on tangible and intangible assets*
Dividends from joint ventures
Free cash flow
Acquisition of subsidiaries net of cash acquired
Disposal of subsidiaries and operations net of cash disposed
Transaction-related costs
Purchase of own shares and issue proceeds of share capital
Financing**
Management estimation of charges related to UK Government reviews
Other exceptional items***
Special pension contribution
Dividends paid
Group net decrease in cash and cash equivalents
Adjustment to include joint venture cash impacts
Net decrease in cash and cash equivalents before exchange loss
Exchange loss
Net decrease in cash and cash equivalents
2013
£m
233.1
53.0
286.1
(144.0)
142.1
(38.2)
(18.8)
(51.8)
51.5
84.8
(18.6)
40.6
(2.8)
(14.9)
73.2
(9.2)
(83.7)
(19.7)
(51.5)
(1.8)
(5.6)
(7.4)
(15.9)
(23.3)
2012
(restated)
£m
236.9
56.0
292.9
(47.2)
245.7
(44.6)
(33.6)
(66.9)
80.6
181.2
(141.8)
131.0
(3.9)
(10.3)
(152.0)
–
(5.0)
–
(41.9)
(42.7)
(4.5)
(47.2)
(9.0)
(56.2)
Notes:
* Net expenditure on tangible and intangible assets excludes assets funded under finance lease arrangements.
** Financing is stated net of directly reimbursed capital expenditure.
*** Exceptional items include an amount of £22m due to the UK Government that was satisfied through a net settlement in relation to receipts on billed amounts
due from the same customer.
3.1 Adjusted operating cash flow excluding joint ventures
Adjusted operating cash flow excluding joint ventures was £142.1m (2012: £245.7m).
The movement in working capital of £144.0m (2012: £47.2m) principally relates to timing differences between the period when costs are incurred in the
delivery of the contract and the period when we can contractually bill our customer. Examples of this include: Shop Direct, where we have undertaken
transition services in the first two years of the contract which may only be billed and recovered from the customer over a longer period; Defence
Marine Services (DMS) in Australia, where there has been significant vessel maintenance in the year, with recovery spread over a longer period; and
Fiona Stanley Hospital, where there has been spend related to the start of the contract which will be billed and recovered in a later period. There have
additionally been outflows from the decline in the accelerated payment cycle from some of our customers in 2013 and delays to receipts from certain
customers in AMEAA.
Interest
3.2
Net interest paid decreased to £38.2m (2012: £44.6m), principally due to the payment in 2012 of £5.6m of facility fees relating to the refinancing of the
revolving credit facility.
3.3 Tax
Tax paid was £18.8m (2012: £33.6m). Cash tax remains below the equivalent charge in the income statement, principally as a result of the availability
of accelerated capital allowances and other timing differences, together with the impact of tax relief on exceptional items primarily in the UK.
3.4 Net expenditure on tangible and intangible assets
Net expenditure on tangible and intangible assets was £51.8m (2012: £66.9m). This represents 1.2% of revenue (2012: 1.6%).
3.5 Dividends from joint ventures
Dividends received from joint ventures totalled £51.5m (2012: £80.6m), with the decline reflecting lower profits from joint ventures and from the impact
of the former DMS joint venture, which became a wholly owned subsidiary in late 2012.
47
Strategic Report Finance review
3.6 Purchase of own shares and issue proceeds of share capital
The net £14.9m cash outflow in the year related to a £16.0m outflow (2012: £16.0m) for the Employee Share Ownership Trust (ESOT) in order to
satisfy options granted under the Group’s share option schemes and £1.1m (2012: £5.7m) of proceeds from the issue of share capital and exercise
of share options.
3.7 Financing
The inflow from financing of £73.2m (2012: outflow of £152.0m) is primarily due to additional private placements taken out in the year. Further details
on sources of funding are included in section 8 below.
3.8 Management estimation of charges related to UK Government reviews
There was cash spend of £9.2m (2012: nil) in relation to management’s estimation of the charges related to the UK Government reviews.
3.9 Other exceptional items
There was spend of £83.7m (2012: £5.0m) in relation to other exceptional items. This included the agreed settlement paid on 23 December 2013 to
the UK Central Government of £66.3m, together with related VAT of £5.8m, in relation to the Electronic Monitoring and PECS contracts. There was also
£11.6m of spend in relation to restructuring and the direct costs associated with the UK reviews.
3.10 Special pension contributions
The special pension contributions of £19.7m relate to a £16.8m payment to fund the deficit on the Vertex pension fund, prior to its transfer into the
Group’s largest defined benefit scheme, Serco Pension and Life Assurance Scheme (SPLAS), and £2.9m in relation to deficit recovery funding of the
Walsall defined benefit pension scheme. The Vertex payment enabled its separate defined benefit scheme to be closed and thereby reduces ongoing
administration costs.
3.11 Reconciliation of free cash flow
The table below reconciles the net cash from operating activities in the consolidated cash flow statement to the free cash flow at the beginning
of section 3 of the Finance Review.
Year ended 31 December
Operating activities:
Net cash inflow from operating activities before cash spend on special pension contribution and other exceptional items
Investing activities:
Net cash inflow/(outflow) from investing activities
Less: Increase in security deposits
Less: Proceeds on disposal of subsidiaries and operations
Less: Acquisition of subsidiaries, net of cash acquired
Financing activities:
Interest paid
Management estimation of charges related to UK Government reviews
Transaction-related costs
Directly reimbursed capital expenditure and other financing items
Free cash flow
2013
£m
2012
£m
111.3
225.9
14.2
0.2
(40.6)
18.6
(4.0)
–
(131.0)
141.8
(40.8)
(47.1)
9.2
2.8
9.9
84.8
–
3.9
(8.3)
181.2
48
Serco Group plc | Annual report and accounts 2013Strategic Report 4. Acquisitions
Deferred consideration payments in relation to acquisitions totalled £18.6m (2012: £141.8m). This represented £11.9m in relation to the acquisition
of Intelenet and £6.7m in relation to the acquisition of The Listening Company.
5. Disposals
The table below shows the net cash proceeds from the disposal of businesses and operations, reflecting the cash proceeds less any cash and cash
equivalents disposed and disposal costs paid in the year.
Year ended 31 December
UK transport maintenance and technology business
UK occupational health business
Ascot College
Nuclear consulting services business
German operation
Education software business
UK data hosting operations (disposal cash costs)
Net cash proceeds
6. Net debt
At 31 December
Group – cash and cash equivalents
Group – loans
Group – obligations under finance leases
Group recourse net debt
Group non-recourse debt
Net debt
2013
£m
40.2
2.2
0.7
–
–
–
(2.5)
40.6
2013
£m
125.1
(782.2)
(68.0)
(725.1)
(20.3)
(745.4)
2012
£m
–
–
–
129.8
(3.5)
4.7
–
131.0
2012
£m
142.8
(699.5)
(50.2)
(606.9)
(25.1)
(632.0)
Adjusted net debt, which includes the proportional share of joint venture net cash of £44.2m, is £701.2m (2012: £580.7m). A reconciliation of net debt
is present in section 6.3 below.
6.1 Group recourse net debt
Group recourse net debt increased by £118.2m to £725.1m (2012: £606.9m). Sources of funding are described in section 8 below.
Cash and cash equivalents include encumbered cash of £10.2m (2012: £7.5m). This is cash relating to customer advance payments.
6.2 Group non-recourse debt
The Group’s debt is non-recourse if no Group company other than the relevant borrower has an obligation to repay the debt under a guarantee or other
arrangement. The debt is excluded from all of our credit agreements and other covenant calculations, and therefore has no impact on the Group’s
ability to borrow.
Group non-recourse debt decreased by £4.8m to £20.3m. The decrease is mainly due to the final repayment of debt on our Driver Examination Services
contract in Canada.
49
Strategic Report Finance review
6.3 Reconciliation of free cash flow to recourse net debt
The tables below reconcile free cash flow at the beginning of section 3 of the Finance Review to the movement in Group recourse net debt and net debt.
Year ended 31 December
Free cash flow
Acquisition of subsidiaries net of cash acquired
Disposal of subsidiaries and operations net of cash disposed
Transaction-related costs
Purchase of own shares and issue proceeds of share capital
New loans on acquisition of subsidiaries
Repayment of non-recourse loans
New and acquired finance leases
Management estimation of charges related to UK Government reviews
Other exceptional items
Special pension contribution
Dividends paid
Other financing items including foreign exchange
Movement in Group recourse net debt
Recourse net debt at 1 January
Recourse net debt at 31 December
Year ended 31 December
Repayment of non-recourse loans
Non-recourse loan advances
Foreign exchange
Movement in non-recourse debt
Non-recourse debt at 1 January
Non-recourse debt at 31 December
Year ended 31 December
Movement in total net debt
Net debt at 1 January
Net debt at 31 December
2013
£m
84.8
(18.6)
40.6
(2.8)
(14.9)
–
(10.2)
(33.0)
(9.2)
(83.7)
(19.7)
(51.5)
–
(118.2)
(606.9)
(725.1)
2013
£m
10.2
(5.3)
(0.1)
4.8
(25.1)
(20.3)
2013
£m
(113.4)
(632.0)
(745.4)
2012
£m
181.2
(141.8)
131.0
(3.9)
(10.3)
(15.2)
(8.7)
(26.1)
–
(5.0)
–
(41.9)
3.6
62.9
(669.8)
(606.9)
2012
£m
8.7
(18.4)
0.1
(9.6)
(15.5)
(25.1)
2012
£m
53.3
(685.3)
(632.0)
7. Pensions
The Group is a sponsor of a number of defined benefit schemes and defined contribution schemes. At 31 December 2013, the net retirement benefit
asset included in the balance sheet arising from our defined benefit pension scheme obligations was £42.7m (2012: £26.1m). The pension scheme
asset base is £1.4bn.
Defined benefit pension schemes
At 31 December
Group schemes – non contract specific
Contract specific schemes
Net retirement benefit asset
Intangible assets arising from rights to operate franchises and contracts
Deferred tax liabilities
Net balance sheet asset
2013
£m
58.4
(5.5)
52.9
1.0
(11.2)
42.7
2012
(restated)
£m
45.5
(13.8)
31.7
3.2
(8.8)
26.1
50
Serco Group plc | Annual report and accounts 2013Strategic Report Serco has two main types of scheme which are accounted for as defined benefit pension schemes. Each type has its own accounting treatment
under IFRS. These are:
●●● Non contract specific – schemes which do not relate to specific contracts or franchises. For these schemes we charge the actuarial gain or loss for
the period to the consolidated statement of comprehensive income (the SOCI); and
●●● Contract specific – schemes relating to specific contracts or franchises, where the deficit will pass back to the customer or on to the next contractor
at the end of the contract. For these schemes, we charge the actuarial gain or loss on our share of the deficit for the period to the SOCI, recognise
a recoverable intangible asset on the balance sheet at the start of the contract or franchise and amortise the intangible asset to the income statement
over the contract or franchise life. Serco has limited commercial risk in relation to the contract specific schemes because the deficit will, in general,
pass back to the customer or on to the next contractor at the end of the contract.
Amongst our non contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). At 31 December 2013, SPLAS had
a surplus of £64.2m (31 December 2012: surplus of £69.7m). This is calculated under IAS 19 Revised using market-derived rates at 31 December 2013.
It therefore reflects the effect of the market conditions on investment returns in the period.
The estimated actuarial deficit of SPLAS, calculated using prudent Trustee assumptions, as at 31 December 2013 was approximately £13m
(2012: £11m). The value calculated in the latest triennial review was a deficit of £24m at 5 April 2012. We continue to review the level of benefits
and contributions under the scheme in the light of our business needs and changes to pension legislation.
8. Treasury
The Group has a five-year multi currency revolving credit facility of £730m (31 December 2012: £730m). This five-year multi-currency revolving credit
facility, which was signed on 28 March 2012, matures in March 2017. As at 31 December 2013, £175m had been drawn (31 December 2012: £178m).
In addition to the bank facility, Serco has US private placements totalling £575m (31 December 2012: £461m) which will be repaid between 2014 and
2024, with £23m maturing in 2014. This includes $240.0m of new notes issued in May 2013.
The above facilities are unsecured and have financial and non-financial covenants and obligations typical of these arrangements. The principal financial
covenants (as defined) require leverage not to exceed 3.5 times EBITDA and EBITDA to cover interest at least 3.0 times. As at 31 December 2013 these
ratios were 2.3 times and 8.8 times respectively.
9. Going concern
In order to satisfy ourselves that we have adequate resources for the future, the Directors have reviewed the Group’s committed funding and liquidity
positions, and our ability to generate cash from trading activities. The Directors have also reviewed our strategy and the principal risks we face.
Whilst the current economic environment continues to contain uncertainties, our revenues are largely derived from long-term contracts and our
contract portfolio is of sufficient diversity that a downturn in any particular market, sector or geography has a diluted effect on the Group as a whole.
The Group’s principal funding is through a revolving credit facility and US private placements. As at 31 December 2013, the Group had £1,305m of
committed credit facilities and headroom of £555m. The revolving credit facility matures in March 2017, whilst repayments of the US private placements
occur between 2014 and 2024, with a scheduled repayment of £23m in August 2014. The Group fully expects to meet these repayments through
operational cash flows.
Based on the information set out above, the Directors have a reasonable expectation that the Company and the Group will be able to operate within
the level of available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the financial statements on
a going concern basis.
Andrew Jenner
Group Chief Financial Officer
51
Strategic Report Corporate responsibility
The issues we faced in the second
half of 2013 have only served to
reinforce our view that for Serco
to be successful and sustainable,
we have to work in the right
way. This means living up to our
responsibilities to our customers,
the public, our employees,
partners, suppliers, communities
and the environment.
Being a responsible business
means ensuring that we:
●●● always do the right thing
By being responsible, we will enhance our
financial performance and create sustainable
value for our shareholders. The importance
of corporate responsibility (CR) means that
we have built it into the way we operate,
embedding it in all aspects of the Serco
Management System (SMS). The SMS
defines the rules that govern the way we
behave, operate and deliver our strategy.
It encompasses a set of Group-wide policies
and standards, covering subjects ranging from
health, safety and the environment (HSE) to
procurement and supply chain. During 2014,
we will further develop the SMS, including
our values and code of conduct, as part of
our corporate renewal programme. More
information on the key components of the
programme can be found on page 60.
●●● are open and transparent with
our customers, our people and
the societies we serve
The way we manage our responsibilities and our
performance in the year are summarised below.
We also publish a fuller CR report online, which
is available at www.cr2013-serco.com.
●●● deliver on our commitments
and comply with the law
●●● engage with and motivate
our people
●●● act safely and with respect for
the environment and those with
whom we work
●●● minimise business risks
●●● achieve appropriate financial
returns, and
●●● develop and safeguard our
reputation and brand.
Managing corporate responsibility
Our CR framework encompasses: our
people; health and safety; communities; the
environment; our marketplace, which covers
our relationships with our customers, suppliers
and other parties; and our commitment to
ethics and business conduct.
The Serco Group plc Board has ultimate
responsibility for our Group business strategy
and therefore approves our Group CR strategy.
One of our non-executive directors is the Board
sponsor for CR and chairs the CR Committee.
In October 2013, we announced that we
would establish a Board committee for CR,
to take oversight of our approach to ethics,
the structure of governance, risk management
and HSE matters. This committee, which met
for the first time in February 2014, will meet
quarterly to receive formal progress reports
against each element of the CR framework.
More information on the CR Committee can
be found in the Corporate Governance Report
on page 81.
The Chief Executive is a member of the
CR Committee and is responsible for
promoting the Group’s CR strategy and
its effective implementation across the Group.
The Executive Committee is responsible for
implementing our Group CR objectives.
Our people need to feel confident that there
is somebody they can turn to discuss potential
ethical conflicts that may arise during bidding
or when transitioning or operating contracts,
so the matter can be discussed openly and we
can take authoritative decisions. Towards the
end of 2013, we therefore appointed an ethical
lead in each division, who will be answerable
to a divisional ethics committee, which has
now been established.
Developing our CR strategy
Each element of CR has its own strategy,
which we develop as follows:
●●● The Group HR Director sponsors our people
strategy, which is developed through the
Global HR Directors Forum. The forum
includes divisional HR directors and other
senior corporate function members.
●●● The Group Director of Risk and Acquisitions
sponsors our HSE strategy. This is based
on our divisional strategies and the Group’s
evolving HSE risk profile. The HSE Oversight
Group is made up of senior corporate
function members and divisional HSE leads.
It agrees the HSE strategy before submitting
it to the Group Risk Management and Safety
Committee (GRMSC). The GRMSC reviews
the HSE strategy and monitors performance
at its quarterly meetings. The chair of the
GRMSC reports and presents the HSE
strategy to the Executive Committee.
●●● Our community strategy is developed
through a CR Oversight Group. The
Executive Committee then reviews and
monitors our community strategy.
●●● Serco operates across many countries,
jurisdictions and cultures, so we adopt a
flexible approach to the marketplace. This
includes actively engaging our stakeholders,
so we can take account of their views when we
make decisions. This process is embedded in
our overall business strategy.
Serco is one of the UK’s top 100 employers
of apprentices.
52
Serco Group plc | Annual report and accounts 2013Strategic Report ●●● The Director of Business Compliance and
Ethics has responsibility for the Group’s Code
of Conduct. Our Code and matters pertaining
to our ethical position will be reviewed and
monitored by the CR Committee. We are clear
on the ethical standards we expect from all
employees and this is communicated through
the Code, which all employees receive. This
is supported by training on the Code for all
employees. As part of the corporate renewal
programme, we have refreshed our Code,
which will be relaunched in 2014.
●●● Each division has a CR strategy, which is
owned by the divisional CEO and monitored
by the divisional board. Our contracts
develop CR initiatives that fit their divisional
strategies, their business and their local
communities. The contract director is
responsible for delivering these initiatives.
●●● Our CR activities also reflect our people’s
passionate involvement in local causes,
which often involve them volunteering to
raise money or provide direct help.
People
We depend on our people’s skills and
commitment to deliver the services our
customers expect. Our people contribute
directly to our reputation and ability to grow.
Our human resources activities are designed
to create a robust and sustainable organisation,
which can operate effectively in a complex
environment. To do this, we follow a clear
people strategy, as described in the strategy
section on page 11.
For 2013, we set the following objectives
in relation to our people:
Objective 1: To continue to develop
leaders who are fit for the future by
embedding the talent review and
succession planning process across
a wider proportion of our
management population
During the year, we embedded our talent
management processes around the Group
and focused on consistently improving them.
We are now linking these processes to our
wider leadership agenda. This has seen us
carry out a significant piece of work with our
leaders around the world, to determine what
we expect from leaders in Serco.
This work has allowed us to create a new
leadership model, which we will roll out in 2014.
Our aim is to identify people who have the
desire and capability to be leaders at all levels
in the organisation and to help them fulfil their
potential. Whether people are interested in
developing their skills, managing a small group
or taking on wider responsibilities, the model
will enable them to understand what capabilities
they need to develop and demonstrate, so they
can progress to the next level of leadership.
It will also help to communicate and embed
our values throughout the organisation.
Objective 2: To improve our overall
employee engagement levels by
focusing on the top engagement
drivers across Serco
Each year, we undertake a global employee
survey called Viewpoint. This gives us important
insights into how we can improve the working
experience at Serco. In 2013, we achieved a
response rate of 82%. The survey showed that
overall levels of engagement declined slightly
in the last 12 months, in part reflecting the
specific challenges Serco faced in 2013.
However, it also identified a generally positive
corporate culture, with most employees feeling
they have good working relationships with
colleagues, that their contract provides a
high level of customer service and that Serco
values diversity.
The results analysis also identifies the drivers
that will most improve engagement, if we take
action. To optimise engagement, we therefore
need to focus on what we do with the survey
results. In 2014, the Executive Team will be
senior sponsors of employee engagement and
personally commit to three actions. These are:
1. Engaging the leadership team. Leadership
engagement is critical to the business
and improving the overall engagement
of employees. Our actions will include
focus groups with the leadership team
in all regions, ‘listening sessions’ with the
Chief Executive and Executive Committee,
and aligning engagement and leadership
development.
2. Bringing to life the strategic narrative for
Serco. For employees, feeling part of Serco
is the top driver to improve in this year’s
results. To close the gap, we need to clarify
the role Serco plays in supporting great
service delivery, to enable our people to
realise their service vocation. This effort will
be linked to other elements of corporate
renewal, such as our review of our values
and our new leadership model. It will include
a broader range of communication channels
and greater recognition of best practice and
individual achievements.
3. Developing employee engagement as
a strategic priority. To meet our strategic
objectives, we need to focus on engaging
our people and using engagement data as a
predictive indicator of ethics and compliance
risks. We will create a set of global employee
wellbeing principles, with resources for
all regions, and continue our focus on
performance-related processes, such as
setting objectives and reviews.
During the year, we also continued to support
Engage for Success, an independent and
voluntary group of leaders, managers, trade
unionists, engagement practitioners and
experts, who all want to highlight the importance
of employee engagement.
Objective 3: To continue to implement
MyHR – our single HR programme and
common core processes – throughout
the business
MyHR provides a range of self-service tools
for both managers and employees. It gives
managers better visibility and control of their
team information, the ability to carry out people
management activities online, and access
to reports to support planning and decision
making. The system also makes HR processes
easier for employees, for example by allowing
them to maintain their personal information or
book annual leave online.
We depend on our people’s skills and commitment
to deliver the services our customers expect.
53
Strategic Report Corporate responsibility
Continued
At 31 December 2013, the numbers of men and women employed by Serco were as follows:
Number
Percentage
Male
Female
Male
Female
Directors
Senior managers
5
56
1
8
83.3%
16.7%
87.5%
12.5%
Employees*
77,780
41,020
65.5%
34.5%
* At 31 December 2013, we had 120,535 employees, of which we had gender information on 118,800.
Implementation has taken place across a
complex global environment, which presented
us with a number of technical and organisational
challenges. We resolved these in the first half of
the year and put in place improved processes
for dealing with issues as they emerge.
We continued to develop the system during
the year, including better forms and training
managers in using MyHR Online and our people
management processes. We now intend to
move to the next stage of development, adding
more functionality to MyHR to include learning,
reward and performance management. It will
also help us to deploy training and compliance
programmes to all our people, for example
around our Code of Conduct.
During the year, we transferred HR processing
for our Middle East business to our transaction
centre in Delhi.
2014 objectives
Our people objectives for 2014 are to:
●●● roll out our new leadership model
●●● continue to build on best practices
in engagement, and
●●● add new functionality to MyHR and use
the system to improve our efficiency
On 3 March 2014 we announced the
appointment of three new non-executive
directors. At the date of this report, we therefore
had nine directors, of whom three are female.
Human rights
Respecting human rights is an important
principle for us but it is not a significant issue
for our business.
We recognise and apply the principles in
the Universal Declaration on Human Rights.
Our Governance, Conduct and Ethics policy
requires us to respect the human rights and
dignity of individuals and to not take part in, or
benefit from, any activity that breaks any law
relating to human rights or that supports or
encourages the abuse of human rights. We also
have a human rights ‘decision tree’, which we
use to assess the potential human rights issues
associated with contracts for which we are
thinking of bidding .
Diversity
Serco is an inherently diverse business.
However, we still need to promote diversity and
ensure that all our employees are able to be
successful and happy at work, regardless of
their background. We therefore have a global
diversity strategy, based on a set of global
principles, details of which can be found on
our website, www.serco.com.
Health and safety
Our aspiration is zero harm. Nothing is so urgent
or important that we cannot do it safely. A strong
HSE performance ensures the safety of our
people and protects our reputation. Wherever they
work and whatever their role, our people must
adhere to stringent health and safety procedures.
These procedures are embedded in the SMS and
are the minimum standards that apply.
54
Serco operates in a number of heavily
regulated, safety-critical areas, which places
stringent requirements upon us. We have the
systems in place to deliver these requirements,
as reflected in the regulatory approvals and
licences we operate under. This also means
that we have regular regulatory oversight.
Together, these factors give us a strong
controls framework for managing our HSE
responsibilities.
For 2013, we set the health and safety
objectives below. Definitions of these metrics
are contained in our CR report.
Objective 1: A lost time incident (LTI)
rate of 573 per 100,000 employees,
representing a 5% reduction against the
2012 baseline
The LTI rate fell from 611 in 2012 to 505 in 2013,
a reduction of 17%. All our divisions improved
their performance during the year.
Slips, trips, falls and manual handling are
the biggest contributors to LTIs, so we have
implemented risk reduction initiatives, including
staff awareness and training.
More specifically, the UK & Europe division took
a risk based approach to safety critical areas,
with initiatives including improved governance
Nothing is so urgent or important that we cannot do
it safely and we have a strong controls framework for
managing our HSE responsibilities.
Serco Group plc | Annual report and accounts 2013Strategic Report to provide oversight and challenge, consistent
processes and toolsets across the division,
and a core curriculum of online safety training.
Our Americas division took prompt action
to address a spike in LTIs in its Engineering
business unit, with a focus on injury prevention
awareness.
We also made organisational changes across
AMEAA, to create a single HSE delivery function
supported by a centre of excellence that directs
policy, systems, processes and reporting.
Global Services identified fatigue as the root
cause of some incidents at the start of the
year. We issued global guidance on fatigue risk
assessment and management to all divisions.
Objective 2: A major reportable incident
rate of 57 per 100,000 employees,
representing a 15% reduction against
the 2012 baseline
The number of major reportable incidents
fell by 45% to 33 in 2013, resulting in a rate
of 33.4 per 100,000 employees. This was
well below our target of 57 and the UK Health
and Safety Executive Total Service Industries
benchmark of 91.5.
One third of the major reportable incidents
related to road traffic incidents in Global
Services towards the beginning of 2013, which
were addressed through the global guidance
on fatigue discussed above. AMEAA has seen
a significant reduction in major incidents, as
a result of our safety initiatives over the last
18 months. We also closely monitored major
reportable incidents in our UK & Europe
division, resulting in a continued reduction
in the incident rate throughout 2013.
Objective 3: A physical assault rate
of 528 per 100,000 employees,
representing a 15% reduction against
the 2012 baseline
No employee should be subjected to either
physical or verbal abuse. The physical assault
rate fell by 23% to 482 in 2013, beating our
target by 9%.
The risk of physical assault is highest in our
UK & Europe and AMEAA divisions, reflecting
the nature of some of their contracts, including
prisons and immigration work. AMEAA has
reduced the potential for assaults through
controls such as intelligence reports and
surveillance, training our people in de-escalation
and situational response, and a violence
reduction strategy in our New Zealand justice
and corrections business. UK & Europe has
continued to raise awareness of reporting
requirements and liaised with national HSE
groups which focus on this topic. We continue
to review and implement specific control
measures across the contracts.
2014 objectives
For 2014, we have set the following health
and safety targets:
●●● an 8.5% reduction in the LTI rate to 462
●●● to sustain a major reportable incident rate
under 40, and
●●● a 4.6% reduction in the physical assault
rate to 460
Community
Our communities are primarily the people who
live and work around our contracts but our
definition extends to include the third-sector
organisations we partner with, to deliver
a number of our contracts.
Working with communities contributes directly
to our business success. It helps to enhance
our reputation and build trust with our customers
and the public, by demonstrating that Serco is
a values-led organisation. Engaging also gives
us a better understanding of communities’
needs, which can help us to win bids and
to operate existing contracts successfully,
particularly where we are delivering services
directly to the public.
For 2013, we set the following objectives:
Objective 1: To continue to invest 1% of
Adjusted pre-tax profits into wider society
We invested £2,575,029 into society,
through donations of money, assets and time.
This represented 1% of our Adjusted profit
before tax.
The chart below shows the activities that made
up this total:
Community investment 2013 (£000)
997
622
338
Total
£2,575
618
Cash donations
Gifts in kind
Staff volunteering
Management time
Objective 2: To promote and support
the Serco Foundation
2013 marked Serco’s 25th anniversary as
a listed company. In preparation for this
milestone, we had established the Serco
Foundation in the UK during the previous year.
Our employees voted for “children” to be the
Foundation’s cause for fundraising support.
In response, the Foundation created the global
“Every Child, Everywhere” initiative, a three-year
commitment based on a belief that children
everywhere deserve the best possible start
in life.
During the year, the Foundation engaged
our people and our communities to support
nine child-related charities around the
world. Some incredible individual and team
achievements raised more than £400,000
for the chosen charities.
Working with our communities contributes directly
to our business success and gives us a better
understanding of their needs.
55
Strategic Report Corporate responsibility
Continued
Objective 3: To use the Serco25
campaign to encourage our people
to raise money for charities
We wanted Serco25 to enable our employees
to make a difference in our local communities,
encouraging them to take part in numerous
fundraising and other community events during
2013. These ranged from ultramarathons to
volunteering days to helping communities
affected by natural disasters.
To showcase their efforts, we created a
dedicated website so our people could see
what their colleagues around the world were
doing. The site had 220,000 visits, 14,444
registrations and more than one million
page views.
As part of the Serco25 campaign, our people
not only raised over £400,000 for our nine
child-related charities, but also raised more
than £200,000 for other charities of their
own choice.
2014 objectives
For 2014, we have set the following community
objectives:
●●● to continue to invest 1% of Adjusted pre-tax
profits into wider society
●●● to promote and support the Serco
Foundation, and
Environment
Serco’s aspiration for zero harm applies as
much to the environment as it does to health
and safety. It makes good business sense to
protect our reputation and reduce our energy
consumption and environmental impact. Our
environmental policy is also driven by the desire
to do what is right for the world we live in.
Although Serco’s activities are typically
managed at a local level, we are united in our
strategy of measuring our impact and reducing
our environmental footprint. This supports many
initiatives in our operations around the world.
We also have contracts that help our customers
to improve their environmental performance.
For example Serco provides environmental
services to UK local authorities, which help our
customers to reduce the volumes of waste sent
to landfill sites.
For 2013, we set the following environmental
objectives:
Objective 1: To reduce our carbon
emissions headcount intensity rate by
3% to 1,967 tonnes of CO2 equivalent
(CO2e) per 1,000 employees
During the year, we changed the basis on
which we calculate our carbon emissions, in
order to meet the UK’s new regulations on
greenhouse gas reporting. We adopted ISO
14064-1 2012 – Specification with guidance
at the organisation level for quantification and
reporting of greenhouse gas emissions and
removals, which resulted in us collecting a far
more comprehensive data set across all our
operations globally.
The profile of our business has also changed.
For example, 2013 included a full year of the
Northlink Ferries contract, which we took over in
July 2012, and DMS Maritime, which we took full
ownership of towards the end of 2012. This had
a significant impact on our emissions, as these
two operations make up around one fifth of the
Group’s total.
●●● to recognise exceptional contributions made
by our people to the communities in which
they live and work
As a result of these factors, our emissions
performance for 2013 of 4.04 tonnes of CO2e
per full time equivalent (FTE) is not comparable
to previous years. We will therefore use 2013
as the baseline for future reporting.
We have calculated our emissions using a
materiality threshold of 5%, meaning we are
confident that our emissions are within 5% of
the total stated. These calculations have been
verified by Carbon Credentials, an independent
sustainability services provider. More information
on our greenhouse gas emissions can be found
on pages 58 to 59. We have also published a
detailed ‘basis of reporting’ document on our
website www.serco.com.
We continue to contribute to the Carbon
Disclosure Project. In 2013, Serco achieved
a score of 92% (18th equal in the FTSE
350) placing us into the Carbon Disclosure
Leadership Index.
Objective 2: Zero environmental
prosecutions, fines and enforcement
notices from our activities
We once again received no environmental
prosecutions, fines and enforcement notices.
2014 objectives
For 2014, we have set the following
environmental targets:
●●● to improve the materiality threshold of our
greenhouse gas emissions reporting for
all divisions to 5%
●●● to reduce our carbon emissions intensity
(tonnes of CO2e per FTE) by 3%, and
●●● to agree targets for divisional environmental
initiatives, so we can monitor their impact
Marketplace
Customers
Developing and improving long-term
relationships with our customers is central
to our business. The events of the last year
have demonstrated that being clear and
transparent with our customers is fundamental
to maintaining trusting relationships. While day-
to-day responsibility for meeting our customers’
needs lies with our contract directors, our
2013 marked Serco’s 25th anniversary as a listed
company and we used our Serco25 campaign
to enable our people to make a difference in
our communities.
56
Serco Group plc | Annual report and accounts 2013Strategic Report corporate renewal plan aims to increase the
frequency and transparency of our customer
engagement. This will help to ensure we identify
and respond promptly to their concerns. We are
also placing customer satisfaction at the core
of our management reporting and incentive
structures, so we are fully focused on ensuring
our customers receive the high-quality services
they deserve from us.
We will maintain relationships at all levels with
our customers, so they are aware of how we
can help them and we can anticipate their
changing needs. These relationships lie with
our divisional and Group leaders.
Our reputation with our existing customers is
also vital to our success and to our prospects
of future growth. Many factors influence our
reputation, including:
●●● the quality of our service
●●● the trust of our customers
●●● our values and service ethos
●●● our capacity to innovate, and
●●● our engagement with our employees and other
stakeholders, such as local communities.
Suppliers
Effective procurement helps us to achieve
our vision and deliver high-quality service to
customers. We aim to be professional in all
our dealings with suppliers and to establish
mutually beneficial relationships. We have a
Procurement and Supply Chain function, which
is responsible for putting this approach into
practice. Each division has its own dedicated
procurement business partner embedded within
the divisional management team.
Our businesses have many common
purchasing needs which we strive to fulfil with
preferred suppliers, enabling us to achieve
better terms and conditions and make the
most of our scale.
Serco works with thousands of small and
medium-sized (SME) suppliers and we
continue to improve our interaction with them.
Our Small Business Advisory Body in the UK
is made up of representatives of SMEs from
across the business. The Body guides us
on our communications with and support to
SMEs. In the US, we have a supplier mentor
programme, which provides guidance to small
businesses on key matters such as growing
their businesses and creating budgets.
In June 2013, we launched a supplier code
of conduct. This sets out the principles and
standards we expect from those we work
with, to ensure we operate not just legally,
but ethically and fairly.
Joint venture partners
Serco has many joint ventures with commercial
partners and customers. Strong relationships,
based on mutual trust and respect and clarity
of roles, are essential ingredients if a joint
venture is to deliver excellent customer service.
Our divisional management teams are
responsible for relationships with our joint
venture partners, supported by members of
the Group Executive Committee and Board
as appropriate. This includes holding regular
strategy and review meetings with our partners.
Strategic partners
We often deliver services as part of a
consortium, either as prime contractor or as a
subcontractor. This allows us to bring together
companies with the skills to meet the precise
requirements of a bid.
Our values and the open and honest way
in which we work also make us an attractive
partner for voluntary sector organisations,
who often lack the scale and experience to
access major government programmes.
Responsibility for relationships with our strategic
partners lies with the relevant contract and
divisional management.
Serco provides environmental services to UK local
authorities, which help our customers to reduce the
volumes of waste sent to landfill.
57
Strategic Report Greenhouse gas emissions
This section includes our
mandatory reporting of
greenhouse gas emissions,
as required by Section 7
of the Companies Act 2006
(Strategic Report and Directors’
Report) Regulations 2013
(“the Regulations”).
Emissions from:
Tonnes of CO2e
Combustion of fuel and operation of facilities
187,217
Electricity, heat, steam and cooling purchased
for our own use
211,302
– Emissions reported above, normalised
to tonnes of CO2e per FTE
4.04
Sum of emissions by corporate division (tonnes CO2e)
AMEAA
Americas
Global Services
UK & Europe
0
50,000
100,000
150,000
200,000
250,000
300,000
● Electricity, heat, steam and cooling purchased for own use
● Combustion of fuels and operation of facilities
Reporting boundary and responsibility
We report our emissions data using an
operational control approach to defining our
organisational boundary. This follows the
greenhouse gas protocol and defines how we
meet the Regulations’ requirements in respect
of the emissions we are responsible for.
We have reported all material emission sources
for which we consider ourselves responsible
and have set our materiality threshold at 5%.
These sources align with where we consider
we have operational control.
We do not have responsibility for any emission
sources that are beyond our operational
control. For example, business travel other
than by vehicles under our control (including,
for example, commercial air travel) is not within
our operational control and, therefore, is not
considered to be our direct responsibility.
We anticipate reporting accurate and verified
scope 3 emissions data in the 2013-14 report.
Methodology
Serco quantifies and reports to ISO 14064-1
2012. We have used the Department for
Environment, Food and Rural Affairs (DEFRA)
2013 conversion factors within our reporting
methodology. We have also opted to use
operational control as the consolidation
approach, due to the nature of our business,
with employees who are often on customer
sites where no operational control is possible.
As this approach is inconsistent with the
financial statements, we have described the
classification of reporting boundaries in detail
in our Basis of Reporting document, which is
available on our website, www.serco.com.
In some cases, we have estimated emissions
based on similar facilities. This is done, for
example, where our staff work on leased
premises but have no access to actual
consumption figures. In other cases, we have
extrapolated total emissions by using available
information from part of the reporting period and
extending it to apply to the full reporting year.
This has occurred where some information was
Reporting year
Our reporting year for greenhouse gas emissions
is one quarter behind our financial year, namely
1 October 2012 to 30 September 2013. We have
established this reporting year to ensure that the
emissions information we obtain from supplier
invoices is complete.
Global greenhouse gas
emissions data
For the period 1 October 2012 to
30 September 2013:
Total carbon dioxide equivalent
(CO2e) by emission type
53%
47%
Combustion of fuels and operation
of facilities
Electricity, heat, steam and cooling
purchased for own use
58
Serco Group plc | Annual report and accounts 2013Strategic Report not recorded at the start of the reporting period
and before the regulations came into force.
The sum of all estimated emissions is below
3.15% of our global emissions, so we consider
the potential error to be immaterial.
Scope of reported emissions
We have reported emissions data for our
operations in the following countries:
For countries where we have very limited
operations, such as Djibouti, Dominican
Republic and Virgin Islands, where we have
fewer than ten employees, or where our
staff work in facilities where we do not have
operational control, we have undertaken a
materiality assessment and consider that the
related emissions are not material. Emissions
from these operations are therefore excluded
from our reported emissions.
Division
Country
AMEAA
Americas
Global Services
Australia
Bahrain
Hong Kong
India
New Zealand
UAE
USA
Canada
Australia
India
Ireland
UK
UK & Europe
UK
While we have used a materiality threshold of
5%, we have reported emissions for a number
of sites that fall below this threshold.
Intensity ratio
To express our annual reported emissions in
relation to the scale of our activities, we have
used full time equivalents (FTE) as our intensity
ratio. This is the most relevant indication of
our growth and provides the best comparative
measure over time.
Emissions reported have been normalised to
4.04 tonnes CO2e per FTE.
Baseline
The data for 2012-13 forms the baseline for
subsequent periods. Although Serco has
previously reported on emissions, it is not
appropriate to use these reports as baseline
years due to the differing methodologies used.
The emissions that have not been included in
this year’s report relate to refrigerant gases from
air conditioning and refrigeration outside the
UK. After analysis, we believe these emissions
are immaterial. However, we are implementing
processes to capture such data for future reporting.
Reducing carbon and waste
Across more than two thirds of our business,
we are working on our customers’ premises
and are therefore not in direct control of the
environment in which we operate. That is why
collaborative working with our customers
on environmental issues is important. Serco
recognises its responsibility to ensure that any
adverse impact on the environment is reduced,
or where possible, eliminated by applying
the most appropriate management systems
at contract level – whether designed by our
customers or by us.
Where we are not in control of the working
environment, we support our customers in
applying their own environmental management
systems and objectives.
Initiatives and progress
In line with our energy and environmental
management targets, we have implemented a
number of initiatives and made solid progress.
Examples of current initiatives include:
●●● Introducing enhanced monthly reporting for
divisional executive teams, to drive operational
performance improvement across the business,
in line with global and divisional targets.
●●● Developing a Strategic Energy Improvement
Plan for 2014, which aims to reduce carbon
emissions at our largest facilities. This approach
is enhanced across our wider portfolio of
facilities by real-time monitoring and tactical
interventions, where electricity and gas
consumption is outside defined parameters.
●●● Developing a comprehensive employee
engagement programme for 2014. This
programme aims to ensure all employees
are fully aware of their environmental
responsibilities and the role they play in
supporting the delivery of our energy and
environmental management targets.
Our 2013 Strategic Report, from page 2 to page 59, has been reviewed and approved
by the Board of Directors on 3 March 2014.
Alastair Lyons CBE
Chairman
59
Strategic Report Corporate Governance Report
Chairman’s Letter
Dear Shareholder
At Serco, we are committed to achieving high standards of corporate governance, integrity and business ethics in all our activities around the world.
Governance is not an exercise in compliance nor is it a specific form of management. For Serco, our framework of governance is how we ensure the
best interests of all our stakeholders – our customers, our employees, our shareholders, and the societies and communities of which we are a part –
are uppermost in all our minds as we go about our business, and that where these interests are not directly aligned, we make decisions on the basis
of what is right: this is an essential part of our public service ethos. During 2013, we found ourselves challenged at the heart of the way in which we
do business. A number of individuals were found to be acting outside our values as epitomised by our Governing Principles and our framework of
governance had not identified sufficiently clearly the root causes that had allowed this to happen. This challenged the trust in which we are held by
our customers, our employees, and society at large. In response, the Company has designed and implemented a comprehensive programme
of corporate renewal to ensure we respond appropriately to these root causes and put in place the actions, systems and processes to deliver stronger,
more effective governance, organisational change and operational resilience across the Group.
In the following pages, we describe what we are doing in this programme of corporate renewal, and outline the work of the Board and the governance
framework we have designed to meet the current needs of our businesses around the world. We also explain how we have applied the Main Principles
of the UK Corporate Governance Code in the financial year. To illustrate how our governance arrangements work in practice, we have redesigned this
Corporate Governance Report around the key elements of the Board’s role: leadership, effectiveness, accountability and engaging with shareholders.
Board focus
In my Chairman’s Statement I speak about the independent reviews of our culture and systems that we commissioned last year to understand the root
causes of the issues that had arisen. It was these reviews that informed the design of our programme of corporate renewal, the key components of which
are as follows:
●●● Commitment by our leadership throughout the business to ‘do what is right’ by always dealing with customers fairly and placing this above any other
conflicting drivers for success
●●● Revising Serco’s Code of Conduct, Values Statement and Governing Principles, backed up by training, induction and performance management
●●● Strengthening contract level governance, including improved contract bid processes to ensure appropriate levels of operational resource and the
delivery of sustainable performance
●●● Enhancing transparency and access, with robust reporting of operational and financial contract KPIs, and greater engagement of customers
at contract and departmental level
●●● Creating a separate division for our UK Central Government work to achieve both focus and openness for Government as a collective customer
●●● Developing our management system to include more prescriptive guidance on required operational processes and procedures, supported by
strengthened risk management and internal audit processes and capabilities
●●● Appointing three additional Board Non-Executive Directors, one of whom will chair a new Corporate Responsibility Committee to formalise the process
of guidance and decision making on ethical issues – more detail of this new Committee can be found on page 81
●●● Establishing formal Ethics Committees and Ethics Officers in each division, accompanied by the redesign of our whistle-blowing process to the highest
international standards, and
●●● Measuring the progress of attitudinal change throughout the organisation with ongoing independent culture and ethics reviews.
Our Board established a Committee of the Board (the Board Oversight Committee) to oversee the programme. The various reviews and audits undertaken
by the UK Government were completed during the year and found no further evidence of wrongdoing or malpractice. Lord Gold was appointed as an
independent third-party member of this Committee. The full and effective implementation of this programme is fundamental to our future success as a
company that seeks to work in partnership with its customers around the world delivering services to taxpayers. It is management’s top priority, something
that will be appropriately reflected in the structure of management incentivisation. I am pleased to say that to date they are on plan to achieve their various
milestones and that the plan to implement this programme has received a positive assessment by the Government Oversight Group, with the input of
the independent advisers appointed by the UK Government who will continue to monitor the Company’s implementation against the agreed milestones.
Going forward, through leadership, training and guidance, and appropriate incentivisation, we will change the balance of drivers within our business
such that the commitment to do what is right and to deal with our customers fairly and transparently always transcends that sustained drive to succeed.
This will be supported by the right management structures and controls and best-in-class lines of assurance to ensure that through early identification
of risks and issues and their swift resolution we never again compromise on our values and ethics.
In summary, this plan seeks to ensure that never again does someone amongst our 120,000 people do the wrong thing because they do not want
to fail to meet their commercial objectives. And if they do the wrong thing, we will have the controls in place to make sure the problem is identified
at an early stage, acted on, and the lessons learned.
Despite the exceptional events of last year that required my and my colleagues’ absolute focus and that dominated our agenda for the second half
of 2013, the Board has continued its programme of meeting local management with the Board conducting some of its meetings at operational sites.
A number of Board members also undertook tours of international sites to deepen Non-Executive Directors’ understanding of the day to day activities
of the business.
60
Serco Group plc | Annual report and accounts 2013Directors’ Report Board skills and diversity
After 10 years service, David Richardson stood down from the Board at the Company’s Annual General Meeting held on 15 May 2013. We are grateful to
David for his contribution to the Company as both Senior Independent Director and Chairman of the Audit Committee. Malcolm Wyman, who joined the
Board in January 2013, succeeded David in these roles. Malcolm’s significant financial and international business experience makes him well placed to
make a strong contribution.
In last year’s report, I outlined our approach to Board diversity, with particular reference to the Lord Davies of Abersoch’s report ‘Women on Boards,’ and
emphasised our commitment to boardroom diversity, of which gender is one of several aspects. We also stated an aim to achieve appropriate diversity
across all elements of Serco’s management. I am delighted that since I last wrote to you, in addition to Malcolm, we have secured the services of three
new Non-Executive Directors, who bring a broad range of skills and experience to complement our current Board, and of whom two are female. Each has
a great track-record in their particular field of expertise and will add much to the debate around our board table. More information on all members of the
Board can be found on pages 62 to 64.
With these appointments, a third of the Board is female but these are all non-executive members. I believe there is an increasing recognition that the real
issue is not Board composition but the balance of women in senior executive positions. It is this that will provide the opportunity for talented women to
become directors, both executive and non-executive, and it is here that, in my view, we should be focusing. Within Serco we are, therefore, maintaining our
focus on diversity across our management team. At present, 12.5% of our senior managers are female and we will be seeking to increase this over time.
Leadership and effectiveness
As you can see from the above there was considerable change during 2013 to our company and our Board. With the appointments announced
today around half our directors will be new during 2014. Given this extent of change during, and the exceptional events of last year which in turn
caused Board activity that was abnormal both in quantum and nature, I decided that it would not be constructive to undertake our normal annual internal
review of Board effectiveness. I have mentioned above the reviews that we undertook during 2013 into our culture and systems of control. These extended
to the Board and the Board discussed their findings which in turn has resulted in changes to our governance framework, including our Board composition.
Alastair Lyons CBE
Chairman
Compliance statement
Throughout the financial year ended 31 December 2013, Serco Group plc complied fully with all relevant provisions of the UK Corporate Governance Code (the Code)
with the exception of membership of the Audit Committee as explained in the Audit Committee Report on pages 75 to 79 and undertaking a formal internal review of
the effectiveness of the Board, its committees and individual members in accordance with Code B.6.1. The Code can be found on the Financial Reporting Council’s
website at frc.org.uk.
61
Directors’ Report Serco Group plc | Annual report and accounts 2013
Leadership
Corporate Governance Report
Meet the Board
Appointment: Alastair was appointed a Non-Executive
Director of Serco Group plc in March 2010, becoming
Chairman at the conclusion of the Company’s AGM
in May 2010.
Responsibilities: Alastair is responsible for the effective
operation of the Board and oversight of corporate
governance. He is Chair of the Nomination Committee.
Experience: In his executive career, Alastair was
Group Finance Director and subsequently Chief
Executive of the National & Provincial Building Society.
When the society was acquired in 1996 by Abbey
National, he joined the Abbey National main Board
as Managing Director of its Insurance Division. In 1997
he became Chief Executive of the pensions specialist
NPI where he led its demutualisation and acquisition
by AMP, subsequent to which he joined NatWest in
1999 as Director of Corporate Projects. A chartered
accountant with an MA in economics from Trinity College
Cambridge, Alastair has been a non-executive director
of, successively, the Department for Work & Pensions
and the Department for Transport.
External appointments: Alastair has been Chairman of
Admiral Group plc, the direct motor insurer since 2000.
In 2008 he was appointed deputy Chairman of Bovis
Homes Group PLC, one of the UK’s leading quoted
house-builders. In February 2011, he was appointed
Chairman of the Towergate Insurance Group. He retired
in October 2013 from the role of Senior Independent
Director and Audit Chair at the Phoenix Group.
Appointment: Ed was appointed to the Board of Serco
Group plc in October 2013.
Responsibilities: Ed is responsible for the formation
and implementation of the Group’s global strategy,
as well as the day-to-day management of the business
operations and our relationships with the City and other
key stakeholders. He provides leadership to the Group
and represents Serco to major customers, shareholders
and industry organisations. Ed is a member of the
Nomination Committee.
Experience: Ed has been with the Company since 2005,
and until recently was CEO of our Americas division.
He is also part of the Executive Committee. Under
Ed’s leadership, the Americas business tripled in size
with US$1.2bn of revenue and now has over 10,000
employees. Ed was responsible for the integration of
SI International and RCI, two major acquisitions of the
Company. Prior to this, he spent a decade on Wall Street
and a decade in the energy sector.
External appointments: None
Alastair Lyons CBE (60)
Role: Chairman
Edward J Casey, Jr (55)
Role: Acting Group Chief Executive
External appointments: Andrew is a non-executive
director of Galliford Try plc, one of the UK’s leading
construction and house-building groups and is Chair
of its Audit Committee.
Appointment: Andrew was appointed Group Chief
Financial Officer in May 2002.
Responsibilities: Andrew is responsible for the Group’s
financial strategy and management, including reporting,
forecasting, treasury, tax and governance. He shares
responsibility with the Chief Executive for our relationship
with shareholders and the City.
Experience: Andrew, a chartered accountant, joined
Serco in 1996 as Group Financial Controller, having
previously worked for Unilever and Deloitte & Touche
LLP. He became Corporate Finance Director with
additional responsibility for treasury activities in 1999
before joining the Board in 2002.
Andrew Mark Jenner (45)
Role: Group Chief Financial Officer
62
Appointment: Mike joined Serco as a Non-Executive
Director in March 2014.
Responsibilities: Mike is a member of the Corporate
Responsibility, Audit and Nomination Committees.
Experience: Mike was previously the Group Chief
Executive of BAA plc from 2003 to 2006 and Chairman
of Her Majesty’s Revenue and Customs from 2008
to 2012. Mike was previously the Senior Independent
Director at ITV PLC from which he stepped down on
31 December 2013 after eight years on the ITV Board.
External appointments: Mike is currently Chairman of
Coats plc and Which? Limited and is a non-executive
director of Guinness Peat Group plc. Mike has also been
appointed President Elect of the Chartered Management
Institute (CMI) where he will succeed the current
President in October 2014.
Mike Clasper (60)
Role: Non-Executive Director
Appointment: Ralph joined Serco as a Non-Executive
Director in June 2011.
the Graduate Institute of International Studies,
Switzerland, and a BSc from the United States Military
Academy at West Point, NY.
Experience: Ralph was Chairman of EADS North
America until his retirement from that position at the
end of December 2011. He joined EADS in 2002 as
Chairman and Chief Executive Officer of EADS North
America and also served as a member of the EADS
global Executive Committee until 2010. Previously,
Ralph held numerous positions with Northrop Grumman
Corporation, concluding over 20 years of service as
President of their Integrated Systems sector. Prior to
his industry career, Ralph served as an Officer in the
US Army. Ralph has an MA in Public Administration
from Harvard, an MA in International Relations from
Ralph D Crosby, Jr (66)
Role: Non-Executive Director
External appointments: Ralph is a non-executive
director of American Electric Power Co Inc. and Airbus
Group, N.V.
Appointment: Tamara joined Serco as a Non-Executive
Director in March 2014.
External appointments: Tamara is Executive Vice
President at WPP, where she is Managing Director
at Grey Group and CEO, Team P&G.
Responsibilities: Tamara is a member of the Corporate
Responsibility and Remuneration Committees.
Experience: Tamara is currently a Trustee of Save
the Children (UK). In 2013 she stepped down after
completing nine years as a non-executive director of
The Sage Group plc. Previously, Tamara chaired the
Board of Visit London (formerly the London Tourist
Board) from 2001 to 2011.
Appointment: Rachel joined Serco as a Non-Executive
Director in March 2014.
Responsibilities: Rachel is Chair of the Corporate
Responsibility Committee and a member of the
Audit Committee.
External appointments: Rachel is currently a non-
executive director of HSBC Holdings plc where she is
also Chair of the Conduct & Values Committee. Rachel
is also a non-executive director at The Scottish American
Investment Company PLC and Heathrow Airport
Holdings Limited.
Experience: Rachel was Deputy Governor of the Bank
of England from 2003 to 2008 and has been Permanent
Secretary at both the Department for Transport and the
Department for Work and Pensions.
63
Tamara Ingram (53)
Role: Non-Executive Director
Rachel Lomax (68)
Role: Non-Executive Director
Directors’ Report Serco Group plc | Annual report and accounts 2013
Leadership
Corporate Governance Report
Meet the Board
with responsibility for developing group-wide people
practices. Until May 2007, she was an executive director
of Whitbread PLC, having joined the Whitbread Group
in 1989. She has also been a member of the Low Pay
Commission, and a non-executive director of Biffa plc
and Arriva plc.
External appointments: Angie is Group Human
Resources Director of J Sainsbury plc.
External appointments: Malcolm, a chartered
accountant, is a non-executive director and Audit
Committee Chairman of Imperial Tobacco Group PLC,
a non-executive director of Tsogo Sun Holdings Limited
and Senior Independent Director and Audit Committee
Chairman of Nedbank Group Limited in South Africa.
Appointment: Angie joined Serco as a Non-Executive
Director in April 2011.
Responsibilities: Angie is Chair of the Remuneration
Committee and a member of the Audit and Nomination
Committees.
Experience: As Group Human Resources Director of
J Sainsbury plc, Angie serves on Sainsbury’s Operating
Board and has responsibility for corporate, retail and
logistics HR, for 150,000 colleagues.
Previously, Angie was Group Human Resources Director
of Lloyds Banking Group plc, serving as a member
of the Lloyds Banking Group Executive Committee
Appointment: Malcolm joined Serco as a Non-Executive
Director in January 2013.
Responsibilities: Malcolm is Senior Independent
Director and Chair of the Audit Committee.
He is also a member of the Remuneration and
Nomination Committees.
Experience: Malcolm was previously an executive
director and the Chief Financial Officer of SABMiller plc,
until his retirement in July 2011. Malcolm joined SAB in
1986 and joined the board as Group Corporate Finance
Director in 1990. He was appointed to the board of
SABMiller upon its listing on the London Stock Exchange
in 1999. He was Chief Financial Officer from 2001 until
his retirement in July 2011.
6
3
4
3
2
Angie Risley (55)
Role: Non-Executive Director
Malcolm Wyman (67)
Role: Non-Executive Director
Gender Diversity
Male
Female
Board Tenure
1 < One year
2 One and three years
3 > Three years
64
Our governance framework
Our governance structure has been developed over several years to meet the increasing span and complexity of our businesses. We have clearly
defined roles and responsibilities at Board level and below it, to seek to ensure that decisions throughout the organisation are soundly based and risks
are appropriately controlled and monitored.
At a glance
Board
Audit
Committee
Nomination
Committee
Remuneration
Committee
Corporate
Responsibility
Committee
Approvals
and Allotments
Committee
Pages 75 to 79
Page 80
Pages 82 to 105
Page 81
Page 67
Executive Management
Group Chief Executive
Executive Committee
Composition
Group Chief Executive
Group Chief Financial Officer
Divisional Chief Executives
Group Functional Heads
Divisional Chief Executives
Divisional Boards
Composition
Divisional Chief Executives
Divisional Finance Directors
Senior Independent (Internal)
Sub-Committees
Executive Remuneration
Group Risk Management and Safety
Investments and Ethics
Nomination
Sub-Committees
Audit and Risk
Operating & Financial Review
Remuneration
Ethics
The role of the Board
The Board drives the development and performance of the Group to deliver sustainable shareholder value over the long term, by setting the
entrepreneurial and governance framework that supports the achievement of the Group’s strategic objectives within an acceptable risk profile.
It is responsible for setting the Group’s ethical compass and its risk appetite, balancing risks and reward in the interests of shareholders having
regard to the implications for other stakeholders, in particular customers and employees, and for achieving the Group’s commercial potential, whilst
effectively addressing the Group’s weaknesses. It is responsible for oversight and review of the way in which the Group does business; of the Group’s
performance in meeting its commitments to customers, shareholders, and its employees; of the contribution of the Group’s executive management;
of the Group’s principal risks; and of its internal control and risk management processes.
Serco’s business culture and standards of conduct are established and monitored by the Board to ensure that the Group’s goals are achieved
in a manner that also benefits society as a whole. The Corporate Responsibility Report is available online at www.serco.com and illustrates how
Serco’s approach to corporate assurance and responsibility translates from the Board into everyday working practices.
Chairman and Group Chief Executive
The roles of the Chairman and the Group Chief Executive are separately held and the division of their responsibilities is clearly established, set out in
writing, and agreed by the Board. The Chairman leads the Board and ensures that it operates effectively and the Group Chief Executive has primary
responsibility for the development and delivery of strategy and the operational performance of the Group. This separation of the two central board
roles safeguards plurality and a balance of viewpoints on the Board, which promotes better decision-making.
Senior Independent Director
This role is set out under written terms available on the Company’s website www.serco.com. The Senior Independent Director provides an alternative
point of contact to the Chairman, both for shareholders and other directors, should the need arise. The role would also deputise for the Chairman
should the need arise.
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Directors’ Report Serco Group plc | Annual report and accounts 2013
Leadership
Corporate Governance Report
Non-Executive Directors
Although the Chairman and Non-Executive Directors do not carry any executive responsibilities, together with the Executive Directors they are collectively
responsible for the Company’s direction. In particular, Non-Executive Directors apply their skills, experience, and independent judgement to constructively
challenge and contribute to the development of the Group’s strategy and business plans, and to hold management to account for Group performance.
Company Secretary and independent advice
The Company Secretary is responsible for advising the Board on all corporate governance matters, assisting the Chairman in ensuring that all Board
procedures are followed and that there are good information flows, together with facilitating induction programmes for newly appointed directors.
All directors have access to the advice and services of the Company Secretary.
The Board has approved a procedure for directors to take independent professional advice, if necessary, at the Company’s expense.
Key Roles and Responsibilities
Chairman
Group Chief Executive
Leads the Board and ensures that it is effective in all aspects of its role.
●●● Takes a leading role in determining the structure and composition of the
Board, and its capabilities.
●●● Manages the business of the Board, ensuring that it facilitates the Board
to fulfil its role and function and, in doing so, ensuring that:
• the directors receive timely, accurate, concise and clear information; and
• the Board invests sufficient time on each matter for effective consideration
and decision-making, in keeping with the relative importance of each
matter and especially for complex or strategically important issues.
●●● Provides appropriate counsel and support to the Group Chief Executive whilst
respecting executive responsibility.
●●● Takes a leading role in the development and succession needs of the Board,
and the effective performance of each director, including:
• promoting the effective contribution of the non-executive directors;
• ensuring that new directors receive an effective induction; and
• assisting directors in determining individual training needs and ensuring
that they update as appropriate their knowledge and capabilities.
●●● Takes a leading role in the performance evaluation of the Board and
its Committees.
●●● Promotes the highest standards of corporate governance.
●●● Ensures that the Board has effective channels of communication with
shareholders and that the views of principal shareholders on significant
matters are taken into account.
Leads the business to develop and deliver the Group’s strategy and business
plans as agreed with the Board.
●●● Provides inspirational leadership across the Group, setting the tone from
the top to promote the Company’s values and the highest ethical behaviour
by all employees.
●●● Develops, motivates and retains a strong, professional and internationally-
minded senior management team capable of meeting the challenges
associated with the Company’s long-term growth strategy.
●●● Identifies strategic opportunities to enable the Group to grow and differentiate
itself, and agrees with the Board a roadmap to realising those opportunities.
●●● Accountable for the Group’s performance and operational management,
including its:
• operational governance;
• ethical compass;
• profitability;
• competitive market position; and
• risk management and internal control systems.
●●● Maintains a close relationship of trust with the Chairman, seeking appropriate
counsel and support whilst preserving executive responsibility.
●●● Leads the executive team, setting a personal example, building team spirit,
ensuring clear lines of communication, developing individual and team
capabilities, and ensuring that robust succession planning processes are
in place.
●●● Acts as an effective ambassador for the Group, developing and maintaining
strong relationships with current and potential customers, and key
stakeholders.
●●● Proactively promotes the Group’s investment case to investors and listens
to the views of major shareholders on key issues affecting the Group.
●●● Communicates both internally and externally the Group’s culture and values,
key strategic imperatives and performance of the business, ensuring that
a clear sense of purpose is conveyed.●
●
Senior Independent Director
Non-Executive Directors
●●● Acts as a sounding board for the Chairman and assists him in the
●●● Constructively challenge and contribute to the development of the
delivery of his objectives as requested.
●●● Provides an alternative point of contact for principal shareholders if
they have any concerns that are unresolved through normal channels
of communication.
●●● Seeks to maintain a balanced understanding of the views and
concerns of principal shareholders.
●●● Takes a leading role in the performance evaluation of the Chairman.
●●● Should it become necessary, leads an orderly succession process for
the Chairman.
●●● In the unlikely event that there is a serious failure in Board governance,
or where normal Board functioning is seriously impaired or the
Chairman is unable to act:
• will act as an intermediary where necessary;
• will intervene to resolve the issues and restore the Board to effective
functioning.
66
Group’s strategy and business plans.
●●● Ensure that the Group upholds high standards of integrity and probity
with appropriate oversight over the effective embedding of the agreed
culture, values, and ethical compass.
●●● Maintain effective oversight and review of the Group’s performance
against agreed goals and objectives, and of the performance of the
executive management.
●●● Maintain an effective understanding and oversight of the Group’s
principal risks.
announcements;
●●● Satisfy themselves as to:
• the integrity of the financial statements and all other formal
• whether, taken as a whole, the annual report and accounts is fair,
• whether the Group’s risk management and internal control
processes, including those relating to the financial reporting
process, are robust and defensible; and
balanced and understandable;
• whether the Board has robustly assessed the solvency and liquidity
risks faced by the Group.
Board succession planning;
●●● Taking primary roles in:
• appointing and, if necessary, removing Executive Directors, and in
• the Board’s determination of remuneration policy for the Chairman;
the Executive Directors, the Executive Committee members and the
Company Secretary.●
Conflicts of interest
The Company’s Articles of Association include provisions reflecting recommended practice concerning any directors’ conflicts of interest. The
Board has in place procedures for directors to report any potential or actual conflicts to the other members of the Board for their authorisation where
appropriate. In deciding whether to authorise a conflict or potential conflict of interest, only non-interested directors (i.e. those that have no interest in the
matter under consideration) are able to take the relevant decision acting in a way they consider, in good faith, is most likely to promote the Company’s
success. The directors may impose conditions or limitations when giving any authorisation, if they think this is appropriate.
The process of reviewing conflicts disclosed, and authorisations given, is repeated at least annually. Any conflicts or potential conflicts considered
by the Board and any authorisations given are recorded in the Board minutes and in a register of directors’ conflicts, which is maintained by the
Company Secretary.
How the Board operates
The Board and its Committees
Currently the Board has nine members: the Chairman, two Executive Directors and six Non-Executive Directors. The Board organises itself with clear
divisions of responsibility so that no individual or group of individuals has unfettered powers of decision-making. Whilst each constituent of the Board
carries out distinct but complementary roles and responsibilities, collectively all directors work for the long-term success of the Company.
Many key board responsibilities are referred to four standing board committees: the Audit, Nomination, Remuneration and Corporate Responsibility
Committees. This structure is recommended under the Code as best practice for UK quoted companies and allows particularly detailed or complex
matters to be given special scrutiny and oversight. The Board has a fifth committee, the Approvals and Allotments Committee, which comprises the
Executive Directors and the Company Secretary, which meets on an ad hoc basis to approve proposals that have more operational significance but do
not merit full Board consideration. Except where decisions are specifically delegated, each committee reports and submits recommendations back to
the Board for its review and, where necessary, decision. Each committee operates within clearly defined terms of reference, which are reviewed annually
by the respective committees and, if necessary approved by the Board, to ensure they remain appropriate and reflect any changes in good practice
and governance; these are available online at www.serco.com.
Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary.
The Board and the four standing committees meet with sufficient frequency to fulfil their respective responsibilities, using structured but flexible
agendas to ensure that regular matters are addressed properly, while allowing time to discuss significant new issues. More information on the work
and performance of the Board can be found in the following pages. Separate reports describing the activities of the Audit, Nomination, Corporate
Responsibility and Remuneration Committees are presented on pages 75 to 81.
Conduct of meetings
Board meetings are scheduled six times a year, of which two are held over three days at a time, two over two days and two meetings are held for one
day each. The directors receive meeting packs in paper and electronic form ahead of each meeting. Board meetings are structured to allow open
discussion of the strategy and trading and financial performance of the Group. To facilitate a proper understanding of the Group’s businesses, Board
and Committee meetings are held at varying locations and the opportunity is used to combine the formal business of the Board with site visits and
divisional presentations and discussions. Additional Board meetings are held as required.
Board decisions are usually taken by consensus. Exceptionally, if a decision is to be taken by vote, the Chairman does not have a second or
casting vote.
Reserved matters
There is a formal schedule of matters reserved to the Board. This schedule, which is reviewed annually, includes approval of:
●●● The Group strategy
●●● Annual financial and operating plans
●●● Major capital expenditure, acquisitions or divestments
●●● Annual and half-year financial results and satisfying itself as to the integrity of financial information
●●● The Company’s dividend policy
●●● Ensuring there are adequate succession plans for the Board and senior management
●●● Appointing and removing directors, the Company Secretary and committee members
●●● Setting and reviewing risk management and treasury policies
●●● Setting levels of operational delegated authorities
●●● Agreeing the Group’s culture, values, and ethical compass
●●● Reviewing the Group’s overall governance arrangements, and
●●● Reviewing the effectiveness of the Group’s system of internal control and risk management processes.
Other specific responsibilities are delegated to Board Committees which operate within clearly defined terms of reference. Details of the responsibilities
delegated to the Committees are given on pages 75 to 81. Each Committee has an appropriate balance of skills, experience, independence and
knowledge of the Group.
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Directors’ Report Serco Group plc | Annual report and accounts 2013
Effectiveness
Corporate Governance Report
The work of the Board
At each Board meeting, the Group Chief Executive presents a comprehensive update on the strategy and business issues across the Group together
with an update on transformation and portfolio management activity. The Group Chief Financial Officer presents a detailed analysis of the financial
performance, both at Group and divisional levels. Senior executives below Board level attend relevant parts of the Board meetings in order to inform
the Board of developments and activities in their areas of responsibility. This provides the Board with access to a broader group of executives and helps
Directors make assessments of the Group’s emerging talent as succession to senior management roles – this was an agreed action arising from the
2012 Board evaluation. During the year, the Board held some of its meetings at divisional locations and conducted in depth reviews of operations and
strategy as well as gaining more presence and visibility amongst management and staff. Individual Board members also conducted several visits to
contract sites in the UK and internationally.
At its meetings during the year, the Board discharged its responsibilities and, in particular, reviewed the following areas. In addition the Board gave
specific focus to the issues that arose in 2013 in relation to certain of its contracts with the UK Government, reviewing their root causes and agreeing
the resulting programme of corporate renewal and the restoration of the Group’s relationship with government:
Strategy and transformation
Investor relations
Business performance
Governance
Financial and risk management
Diversity, talent and succession
Board effectiveness
The Group and divisional corporate strategies, transformation plans, portfolio
management and the Group’s health and safety strategy
Investor feedback and analyst meetings following the release of the full year
2012 and half year 2013 annual results
The operational performance of each of the divisional businesses, and periodic
updates presented by the divisional management teams
Review of the Group’s Treasury policy, risk appetite, work undertaken with
regard to the corporate renewal programme referred to above and in particular
forming the Corporate Responsibility Committee of the Board and the
recruitment of three Non-Executive Directors
The Group’s business plans, presentations on the Group risk register and
significant areas of risk
Presentation from Group Human Resources and Talent Directors
on talent management and development across the Group
Balance
To be effective, the Board must understand the dynamics of Serco’s rich mix of complex businesses across its many diverse markets, including the
issues and factors upon which sustained success depends. A balance of experience, skills and viewpoints within the Board promotes overall Board
effectiveness and enhances Company performance in the long term. The directors are drawn from different backgrounds and industries, and each
has extensive experience of other international businesses in sectors that help inform and augment Board debate.
Induction, training and ongoing development
On joining the Board, each director receives a personalised induction programme including:
●●● An overview of the Group’s businesses, risks, governance arrangements and relations with investors
●●● Structured meetings with a range of relevant senior managers from across the Group
●●● Meetings with key advisors and shareholders as appropriate to the director’s role
●●● Site visits to gain first-hand insight into operational contracts with major customers.
Legal and regulatory updates are essential for good governance, to ensure that directors understand the operational environment of the business.
The Board and Committee meetings incorporate briefings periodically on changes to the business, legislative and regulatory environment, and on
other relevant topics, such as changes to the corporate and remuneration reporting landscape in 2013.
As part of its annual evaluation process, the Board considers the training needs of the directors and the Company Secretary. Development needs fall
within the remit of the Chairman, who reviews and agrees these with each individual. All Board members are encouraged to attend relevant external
training courses at the Company’s expense. More information on Board evaluation can be found on page 69. An induction programme for Malcolm
Wyman was successfully completed on his appointment and a programme for Mike Clasper, Tamara Ingram and Rachel Lomax, who joined the Board
on 3 March 2014, is already underway and includes site visits and meetings with senior executives of, and advisers to, the Group. The Chairman
continues to undertake an extensive programme of contract visits.
Board independence
The Board considers all of the Non-Executive Directors to be independent. In coming to this conclusion, it has determined that each Non-Executive
Director is independent in character and judgement and there are no relationships or circumstances that are likely to affect, or could appear to affect,
the directors’ judgements. In particular, they are independent of management and have no cross-directorships or significant links that could materially
interfere with the exercise of their independent judgement.
The Non-Executive Directors meet separately (without the Chairman or executive directors being present) at least once a year principally to appraise
the Chairman’s performance. This meeting is chaired by the Senior Independent Director.
68
All Non-Executive Directors are appointed for an initial term of three years. Thereafter, subject to satisfactory performance, they may serve one or two
additional three-year terms.
The Board considered the Chairman to be independent on his appointment in 2010. The Nomination Committee keeps the Board’s diversity, balance
and independence under review, the details of which can be found on page 80.
The terms and conditions of the appointment of the directors are summarised in the Directors’ Remuneration Report on page 93 and are available
on request from the Company Secretary.
Re-election of directors
The Company’s Articles of Association stipulate that each director shall retire (but be eligible for re-election) at the annual general meeting held in the
third calendar year following the year in which he or she was elected or last re-elected by the Company. Any directors appointed by the Board since the
last annual general meeting must stand for re-election at the next annual general meeting. Any Non-Executive Directors, excluding the Chairman, who
have served for more than nine years will be subject to annual re-election.
Notwithstanding the above, in accordance with provisions contained within the UK Corporate Governance Code, all directors retired and stood for
re-election at the 2013 Annual General Meeting and will do so on an annual basis at each annual general meeting. Their names are set out in the Notice
of Annual General Meeting.
Time commitment and external directorships
As part of the Board evaluation process, the available time and commitment of each director is considered. The Board considers that the Executive
Directors can gain valuable experience and knowledge through appropriate and limited non-executive appointments in other listed companies or
independent sector organisations. The Board is careful to ensure that any such appointments do not present any material conflicts of interest to Serco,
or compromise the effective management of the Group, and these are approved in advance of any appointments being taken up. Details of the fees
received by executive directors for external appointments can be found in the Remuneration Report on page 102.
Alastair Lyons is non-executive Chairman of Admiral Group plc and of the Towergate Insurance Group and Deputy Chairman of Bovis Homes Group PLC.
The Board believes that Alastair holds a balanced portfolio of positions which allow him to perform his duties as Chairman appropriately.
Board attendance
Board meetings were held on a bi-monthly basis with ad hoc meetings in between as required. The frequency and content of Board meetings are
reviewed by the Board annually.
The attendance of the individual Directors at Board and Committee meetings of which they were members during 2013 was as follows:
Board
Audit
Remuneration
Nomination
Corporate
Responsibility
No. Held
Alastair Lyons
6
6
Christopher Hyman
5(5)
Andrew Jenner
Edward J. Casey, Jr.
David Richardson
6
1/(1)
2/(2)
Angie Risley
Ralph D. Crosby Jr.
Malcolm Wyman
6
6
6
3
2/3
n/a
3
n/a
1/(1)
3
n/a
3
11
9/11
n/a
n/a
n/a
5/(5)
11
n/a
11
5
5
–
n/a
–
2/(2)
5
n/a
5
0
–
n/a
n/a
–
n/a
n/a
n/a
n/a
Notes:
1. The table excludes attendances of directors who attended committee meetings by invitation only.
2. Where a number is given in brackets against a director’s attendance, this is the number of meetings which took place during their tenure.
3. The Corporate Responsibility Committee was designed during 2013 but not formally constituted until 2014.
4. As well as meetings detailed above, 14 additional Board meetings were held during the year, to discuss issues highlighted on the previous pages,
principally around the Corporate Renewal Programme.
Performance evaluation
This year the Board did not undertake a formal internal review of the effectiveness of the Board, its committees and individual members and did not,
therefore, comply with Code B.6.1. The Board last carried out an externally facilitated review with CTMC&A Limited in 2011. CTMC&A Limited has no
connection with Serco other than facilitating Board-level performance evaluations. In line with the Code, the next external review will take place in 2014.
In addition, an evaluation of the Chairman’s performance led by the Senior Independent Director (taking into account the views of both the
non-executive and executive directors) was carried out during the year. It is considered that the Chairman continues to provide strong leadership of
the Board, and there is a good level of trust between him and the Acting Group Chief Executive. The Chairman’s commitment to contract and site visits,
and the value derived from these by the business, was also acknowledged. His very well informed view of the Group’s operations also enables him
to provide a strong sounding board for the executive directors.
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Directors’ Report Serco Group plc | Annual report and accounts 2013
Accountability
Corporate Governance Report
Financial reporting process
The Company has a thorough assurance process in place in respect of the preparation, verification and approval of periodic financial statements.
The process includes:
●●● The involvement of qualified, professional employees with an appropriate level of experience in Group Finance and across the divisions
●●● Formal sign-offs from divisional Chief Executive Officers and Finance Directors
●●● Comprehensive review and, where appropriate, challenge from key internal Group functions
●●● A transparent process to ensure full disclosure of information to the external audits. Engagement of a professional and experienced firm
of external auditors
●●● Oversight of the Audit Committee, involving amongst other duties:
• A detailed review of key financial reporting judgements which have been discussed by management
• Review and where appropriate, challenge on matters including the consistency of, and any changes to, significant accounting policies and
practices during the year; significant adjustments resulting from an external audit; the going concern assumption; and the Company’s statement
on internal control systems, prior to endorsement by the Board.
The above process and the review by the Audit Committee of a comprehensive note from management that sets out the details of the preparation,
internal verification and approval process for the Annual Report and Accounts, provides comfort to the Board that the Group has undertaken an
appropriate process to include the necessary information for it to consider that the Annual Report and Accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
During the year, as part of our programme of corporate renewal, the reporting lines of divisional and business unit finance executives were changed
such that these now have a direct reporting relationship to the Group Chief Financial Officer whilst also remaining a part of the divisional and business
unit management teams.
Managing business risks and internal control
Serco has a system of internal control, including financial, operational and compliance controls and risk management, designed to safeguard
shareholders’ investments, our assets and our reputation. The various reviews and audits undertaken by the UK Government which were completed
during the year found no further evidence of wrongdoing or malpractice.
The Board has overall responsibility for our internal control system and for reviewing its effectiveness, and has delegated to management the
implementation of policies on risk and control.
Risk management is fundamental to how we manage the business; it informs decision making and aligns to the organisation’s strategic objectives.
The systems and processes we have developed to identify and manage the key risks facing each of our businesses and the Group as a whole and the
resources that are committed to risk management, were reviewed during the year as part of the corporate renewal programme and a series of actions
identified to further develop and strengthen our structure of internal control and risk management having regard to the breadth and depth of the Group’s
activities. All parts of the business have appropriate crisis management plans that meet defined policy standards.
Whilst Divisional Boards review quarterly the risks they face, the Group Risk Management and Safety Committee (GRMSC), a formal committee of the
Executive Committee, meets quarterly to provide governance and oversight of risk across the Group. The Corporate Responsibility Committee of the
Board receives a quarterly report on the GRMSC’s assessment of the principal risks facing the Group and the action being taken by management to
mitigate risks that are outside of the Group’s risk appetite.
Our risk management policies, systems and processes align to the guidance contained within the UK Corporate Governance Code and form part
of the Serco Management System (SMS).
Such systems and processes, however, can only be designed to mitigate, rather than eliminate the risk of failure to achieve business objectives, and
can only provide reasonable and not absolute assurance against misstatement or loss. The Board confirms that this process has been in place for the
year under review and up to the date of approval of the 2013 Annual Report and Accounts.
70
Our approach to risk within the Serco Management System
The Serco Management System (SMS) sets out policy standards, systems and processes that identify, review and report risks at all levels of our
business, and in the Group as a whole, that impact upon strategic objectives, with the aim of safeguarding our shareholders’ investments, the
Group’s assets and its reputation. At each level within our business, risk management processes reflect the nature of the activities being undertaken
and the business and operational risks inherent in them, and therefore the level of control considered necessary to protect our interests and those
of our stakeholders.
These controls and processes fall into four main areas: Identification, Assessment, Planning and Control and Monitoring, so that we:
●●● Identify business objectives that reflect the interests of all stakeholders and the risks associated with the achievement of these objectives
●●● Regularly assess our exposure to risk, including through the regular measurement of key risk indicators
●●● Control and reduce risk as far as reasonably practicable or achievable through cost-effective risk treatment options, and
●●● Identify new risks as they arise and remove those risks that are no longer relevant.
Risk identification
In identifying the potential risks associated with the achievement of our business objectives, we consider both external factors arising from the
environment within which we operate, and internal risks arising from the nature of our business, its controls and processes, and our management
decisions.
Once identified, we document risks in risk registers, which are maintained at contract, programme, business unit, divisional and Group levels. These risk
registers change as new risks emerge and existing risks diminish, so that the registers reflect the current threats to the relevant strategic objectives. We
review the Group and Divisional Risk Registers at least quarterly and more frequently as required. The GRMSC reviews the Group Risk Register quarterly
ahead of formal review by the Corporate Responsibility Committee.
Risk assessment
We assess the potential effect of each identified risk on the achievement of our business objectives and wider stakeholder interests. To do so,
we use a risk scoring system based on our assessment of the probability of a risk materialising and the impact if it does. This is assessed from
three perspectives:
●●● The risk’s significance to the achievement of our business objectives
●●● The risk’s significance to society, including its impact on public safety and the environment, and
●●● Our ability to influence, control and mitigate the risk.
Analysis of our key risks allows us to assess the impact of disruption to our business objectives, the probability of this occurring and highlight critical
areas that require management attention.
Risk planning and control
We assign each identified and assessed risk to a risk owner who is responsible for controlling, managing, and developing a robust and effective plan to
reduce or mitigate the risk. Risk owners are required to report to the GRMSC or, as appropriate, the Board on specific risks. Either may ask for additional
information or request an audit to provide additional assurance.
Risk reduction involves taking early management action to remove or reduce identified risks before they can affect the bid, programme, project or
contract. We consider options to eliminate, reduce or control the risks as part of the risk identification and analysis process.
Risk mitigation involves us identifying appropriate measures, including contingency plans, to reduce the severity of the impact of the risks, should they
occur. This includes developing crisis management plans in response to risks whose potential impact warrants a specific management process.
The SMS requires every contract to develop a risk management plan reflecting assessed risks and supported by appropriate measures and
contingency plans to mitigate the impact of the risks.
Risk monitoring
Changes in our external environment, internal structures and management decisions may all affect the nature and extent of the risks to which the
Group is exposed.
Our risk monitoring process therefore regularly monitors changes to our business and the external environment, to ensure that we have sight
of and respond appropriately to reduce the impact of emerging risks.
Managing and mitigating risk
The objective of our risk management process is to provide a governance overview of our operational risk profile. Operational risk can never be
eliminated; risks are necessary to achieve targeted benefits (risk management informs decisions). However, while risk is necessary, we seek to
minimise the probability and impact of threats through the consistent implementation of the SMS, ensuring that appropriate infrastructure, controls,
systems, staff and processes are in place. A comprehensive review of the SMS forms part of the corporate renewal programme in order to address
those areas identified by the 2013 independent review of systems and controls as having contributed to the issues that arose last year on contracts
with the UK Government.
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Directors’ Report Serco Group plc | Annual report and accounts 2013
Accountability
Corporate Governance Report
Some of our key management and control techniques defined in the SMS are set out below:
●●● Our operating processes reflect the principles of clear delegation of authority and segregation of duties
●●● The GRMSC meets quarterly to ensure that risks, internal control and business assurance are effectively managed and reviewed
●●● Our processes of business review are intended to ensure that we meet customer expectations, regulatory requirements and performance criteria,
including operational effectiveness, investment returns, cash flow requirements and profitability. The effectiveness of these processes has been the
subject of particular focus as part of our programme of corporate renewal
●●● The business recognises the importance of relevant key performance indicators to provide an analysis of business performance and variances from
plan, occupational health and safety incidents, and error and exception reporting
●●● Selective recruitment, succession planning and other human resource policies and practices ensure that staff skills are aligned with Serco’s current
and future needs
●●● We maintain insurance policies against losses arising from circumstances such as damage or destruction of physical assets, theft, legal liability for
third-party loss and professional advice
●●● We review the adequacy of our insurance cover at regular intervals
●●● The Investment and Ethics Committee meets regularly to ensure appropriate governance and the management of risk associated with larger or
higher risk bids, acquisitions, disposals and areas of significant capital expenditure
●●● We apply robust project management and change implementation disciplines to all major projects, including new contract transitions, acquisitions,
new technology applications, change programmes and other major initiatives
●●● The Strategic Report describes our approach to health, safety and environmental protection. Qualified and experienced staff in each business unit
provide advice and support on health, safety and environmental issues and undertake regular audits
●●● We have safety specialists in our aviation, rail, defence, nuclear and marine businesses that report to the Board, and maintain and further develop
the very high standards expected in these industries
●●● A Chief Information Officer is responsible for ensuring that systems and processes are in place to ensure the confidentiality, integrity and availability
of sensitive information and the associated information systems that support our business activities
●●● Our Corporate Responsibility Committee has responsibility for the review of ethical issues that may arise from our current and future activities
●●● The Company Secretary manages a confidential reporting service, to which staff can report illegal, dangerous, dishonest or unethical activities
●●● We have crisis and business continuity plans in place to manage crisis events, both within Divisions and the Group
●●● All Divisional Chief Executives are required to self certify their Division’s compliance to the SMS at half and end-of-year points
●●● As mandated by the SMS, throughout the business lifecycle of all our bids and contracts independent reviews (such as Black Hats and Gate
Reviews) are required to provide an appropriate standard of assurance and governance across the business.
Group risk function
The Group risk function forms part of the overall risk management process. While line managers are responsible for identifying and managing all risks
within their risk appetite and tolerance limits, in line with the policies and standards set within the SMS, the Group risk function (reporting to the Director,
Risk and Acquisitions) is responsible for the development and implementation of risk management policy, strategy and governance. In addition to this,
the function provides assurance over the business providing risk management oversight, assurance and challenge as well as managing the Serco
Group overall risk profile.
72
Internal audit
An integral part of risk management is assurance that the controls identified to manage risks are operating and effective. Internal audit is responsible for
reviewing the design and operation of risk management processes and controls operated across the Group, providing objective assurance around the
effectiveness of the Group’s system of internal controls.
During 2013, there was a change in administrative reporting lines of the Group Head of Internal Audit from the Group Chief Financial Officer to the
Group Chief Executive. Functionally, the Group Head of Internal Audit reports to the Chair of the Audit Committee and is responsible for delivery of
the internal audit programme, ensuring that it is risk-based and aligned with the overall strategy of the Group. Internal audit is delivered at Group and
divisional levels, using a mix of co-sourced and in-house resources, with each division operating an Audit and Risk Committee, which reviews the results
of relevant internal audits three times a year. The findings of the overall internal audit programme are reported directly to the Board’s Audit Committee.
The effectiveness and resourcing of our internal audit capability has been specifically reviewed as part of our programme of corporate renewal.
In addition to internal audit, many parts of our business are subject to other reviews of their controls by third parties, including industry regulators,
ISO Standards, customers and other external audits. This third-party scrutiny significantly increases the scope of independent assurance conducted
across the Group each year.
Management assurance
Management assurance is part of the business assurance process. Each division is required to carry out a programme of management assurance to
provide comfort that the division is managing its risks effectively and in compliance with the SMS. The results of the programme are reviewed by the
divisional Audit and Risk Committees.
Business conduct
Serco Group operates within a management system that defines the policies, standards and processes to be applied wherever we operate. Integral
to this is our policy on Business Conduct and Ethics that applies to all business divisions, operating companies and business units throughout the
world. This policy outlines the Group’s position on a wide range of ethical and legal issues including conflicts of interest, financial inducements, human
rights and legal and regulatory compliance. It applies to directors and to all employees regardless of their position or location. Recognising that ethical
dilemmas may arise in a growing company, the Group has an ethics consultation process that is to be followed to determine the Group’s position on
particular issues. To support this process the Investment and Ethics Committee, comprising members of the Executive Team with a quorum of three and
chaired by the Director, Risk and Acquisitions, meets as required. As the leadership of the Company, the Executive Team will make judgements about
what it considers acceptable.
Under the Corporate Renewal Programme, we have established the Corporate Responsibility Committee of the Board to take the lead in determining
the Group’s ethical compass, supported by the creation of formal Ethics Committees and the appointment of Ethics Officers in each division. We have
also redesigned our whistle-blowing process, with input from the Institute of Business Ethics, to benchmark against the highest international standards.
Serco’s outsourced Ethics Hotline operated throughout the year, which enabled employees to report any concerns, or report any wrongdoing, that they
did not feel able to raise with their line manager, human resources colleagues or through other reporting channels. In addition to the Hotline, which is
available 24 hours a day toll-free worldwide in several languages, employees can also make reports via email or the internet. The Company Secretary
independently investigates, with external specialist support where required, any issues raised and reports back to the Audit Committee and, as
appropriate, the Board.
The Group maintains a position of neutrality with respect to party politics. Accordingly, it does not contribute funds to any political party. It does,
however, contribute to the public debate of policy issues that may affect the Group in the countries in which it operates.
The Board confirms that the actions it considers necessary are being taken to remedy the failings and weaknesses which it has determined to be
significant from its review of the internal controls across the Group.
Going concern
The Directors have acknowledged the guidance ‘Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009’ and ‘An update for
Directors of Listed Companies: Responding to increased country and currency risk in financial reports’, published by the Financial Reporting Council
in October 2009 and January 2012 respectively. This is discussed in the Finance Review starting on page 42 .
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Directors’ Report Serco Group plc | Annual report and accounts 2013
Engaging with Shareholders
Corporate Governance Report
How we engage with shareholders
Serco uses a variety of means to gain insight into the views of shareholders and other stakeholders, and the Board is regularly briefed on the feedback
received through these engagement channels.
Primary responsibility for engaging with shareholders rests with the Chairman, Group Chief Executive and Group Chief Financial Officer. In addition,
the Senior Independent Director is available to shareholders should these normal communication channels fail to resolve an issue, or are inappropriate
for any reason.
We have formal arrangements for engaging with shareholders, including those described below.
Investor meetings
The Executive Directors and the Investor Relations team regularly meet with analysts and major investors to maintain effective dialogue. The Chairman
also offers to meet with the Company’s largest institutional investors each year.
The Board reviews an investor relations report each quarter. This highlights share price movements, changes in the share register, the Company’s recent
and planned investor relations activities, analyst recommendations, and significant news from the market and the support services sector. This report
significantly contributes to the Board’s understanding of investors’ views.
Annual General Meetings (AGMs)
The AGM provides an opportunity to communicate with all shareholders, especially our private shareholders. Individual shareholders have the
opportunity to question the Chairman and, through him, the Chairs of the various Board committees and other directors. The Notice of Meeting sets
out the resolutions being proposed at the AGM to be held on 8 May 2014. It is the Company’s policy at present to take all resolutions at a general
meeting on a poll. A poll reflects the number of voting rights exercisable by each member and is considered by the Board to be a more democratic
method of voting. Shareholders are advised of the total number of votes lodged for each resolution, in the categories “for” and “against” together
with the number of “votes withheld”. This information is also posted on the Group’s website www.serco.com.
Formal consultations
When a material change in remuneration policy is being considered, the Chairman of the Remuneration Committee consults with major investors
and seeks their views. From time to time, we seek the views of major shareholders on other Company proposals.
Direct communications initiated by shareholders and representative bodies
From time to time, we receive enquiries and circulars directly from major shareholders and representative bodies, such as the Association of British
Insurers, the National Association of Pension Funds and Pensions Investment Research Consultants. We also review the various environmental, social
and governance reports published about us annually and consider whether any changes are needed to respond to any specific comments.
External advisors
Legal, financial, remuneration and communications advisors gain insights into shareholder attitudes in the course of conducting specific research
or through their work with other clients. Relevant insights are shared when the Board or its Committees are considering important issues and external
advice has been sought.
Corporate website
The Group website www.serco.com is a primary source of information on the Group. The site includes an area tailored for investors, including
information such as an archive of all reports, announcements, presentations and webcasts, share price tools, the terms of reference for all Board
Committees, the Corporate Responsibility Report, and information on voting at the Annual General Meeting. It also has a link directly to the Company’s
registrars, allowing shareholders to view their shareholding online and to vote on the resolutions set out in the Notice of Annual General Meeting.
Approved by the Board of Directors and signed on its behalf by:
John Hickey
Secretary
3 March 2014
74
Serco Group plc | Annual report and accounts 2013
Directors’ Report
Audit Committee Report
Annual statement by the Chairman of the Audit Committee
During the year, the Audit Committee continued with the provision of its effective governance over the appropriateness of the Group’s financial reporting,
adequacy of related disclosures, effectiveness of the internal control systems, and overseeing the external and internal audit functions. A number of
reviews into certain contracts with Government departments were undertaken by the Cabinet Office and the Ministry of Justice as mentioned on pages
2 to 4. The Committee has devoted significant time to monitoring and reviewing the process and outturn of these reviews as well as engaging regularly
with management, Internal Audit and the external auditors.
Membership and meetings
The Audit Committee consists solely of independent Non-Executive Directors.
The Committee welcomed the appointments of Mike Clasper and Rachel Lomax to the Committee from March 2014 and the broad range of skills
and experience they bring to complement the current Committee. In addition to Mike and Rachel, the Committee now comprises of Malcolm Wyman,
who chairs the Committee, and Angie Risley. Following the sad and untimely passing of Paul Brooks, a Non-Executive director, in January 2012,
membership of the Committee had been reduced below the level required by the Code. The Board considered it appropriate to pend increasing the
membership of the Committee until new Non-Executive directors, with the right balance of skills were appointed to the Board and this has now been
addressed. The Company Chairman, who is himself a qualified accountant and an Audit Committee chairman, attended the majority of meetings in
the year and the Board considers that appropriate representation was maintained as a consequence.
Malcolm Wyman, who joined the Committee on his appointment to the Board on 1 January 2013, took over as Chairman of the Committee on
the retirement of David Richardson at the close of the Company’s 2013 Annual General Meeting and has recent and relevant financial experience.
The Audit Committee met three times during the year. At the invitation of the Committee, the Group Chief Financial Officer, the Group Head of
Internal Audit, KPMG LLP (the Group’s internal audit providers) and Deloitte LLP (the external auditors) attend meetings. The Committee meets with
each of KPMG LLP, the external auditors and the Group Head of Internal Audit separately at least once a year. The minutes of the Audit Committee
meetings are circulated to all directors.
Responsibilities of the Audit Committee
The Board has delegated to the Committee responsibility for assisting the Board in maintaining the integrity of the Company’s financial information
and ensuring that the internal controls are robust and defensible, and for making recommendations to the Board in relation to the re-appointment
of the Company’s external auditors. The principal responsibilities of the Audit Committee are:
●●● To monitor the integrity of the financial statements of the Company, including Interim Management Statements, and any formal announcements
relating to the Company’s financial performance, and reviewing significant financial reporting judgements contained therein
●●● To review, approve and monitor the internal audit programme to ensure that the internal audit function is adequately resourced and has appropriate
standing within the Company, and to assess the effectiveness of the internal audit function
●●● To maintain oversight of the external audit activities including discussing with the external auditors, before the audit commences, the nature and
scope of the audit and to review the auditors’ quality control procedures and steps taken by the auditors to respond to changes in regulatory and
other requirements
●●● To review management’s and the internal auditors’ reports on the effectiveness of systems for internal controls, and financial reporting
●●● To consider the appointment, re-appointment or removal of the external auditors, and assess their independence and objectivity, ensuring that key
partners are rotated at appropriate intervals and relevant UK professional and regulatory requirements are taken into account.
Additionally, in accordance with the UK Corporate Governance Code, the Committee is responsible for overseeing a formal whistle-blowing policy and
procedures which apply throughout the Group. This responsibility will be transferred to the newly formed Corporate Responsibility Committee during
2014. Responsibility for the operation of this policy has been delegated to the Company Secretary.
Members of the Audit Committee have received updates on accounting standards and generally accepted accounting practice on a quarterly basis
as part of the Group Chief Financial Officer’s report to the Board, and also on a half-yearly basis from the external auditors.
A copy of the Committee’s full terms of reference are available online at www.serco.com.
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Directors’ Report Audit Committee Report
Principal activities during the year
During 2013 the Audit Committee discharged fully its responsibilities listed above and, in doing so, considered the following key matters:
●●● Monitored the integrity of the financial statements of the Company including the Corporate Governance Report and statement of Directors’
Responsibilities for inclusion in the 2012 and 2013 Annual Report and Accounts, the 2013 Half Year Report and Auditors’ Report thereon and
the Interim Management Statements issued during the year
●●● Accounting issues, judgements and information to support the statements including but not limited to going concern, revenue recognition,
impairments and exceptional items and disclosure of that information to the auditors
●●● The annual audit plan of the external auditors and the 2013 external audit fees
●●● Pre-approving any fees in respect of non-audit services provided by the external auditors and ensuring that the provision of non-audit services
did not impair the external auditors’ independence or objectivity
●●● Review of the whistle-blowing process and significant reports from that process
●●● Evaluation and independence of the Audit Committee and its members
●●● The continuing independence of the external auditors and the effectiveness of the external audit process
●●● The 2013 internal audit programme, the proposed 2014 programme and a review of the restructuring of roles and responsibilities of the
Internal Audit function
●●● Reviewing the internal control environment processes and systems in the light of the outturn of the reviews into certain contracts with Government
departments undertaken by the Cabinet Office and the Ministry of Justice
●●● The Committee’s work plan for the year ahead and a review of its achievement against the Committee’s terms of reference.
At its meeting in February 2014, the Committee reviewed and discussed a comprehensive paper prepared by the Group Chief Financial Officer,
which set out the Group’s accounting policies and basis of preparation; gave consideration to a number of key accounting judgements associated with
financial reporting; set out the Group’s financial control procedures; and considered the impact of new accounting developments. The Audit Committee
also reviewed and discussed a paper prepared by the external auditors, which included significant reporting and accounting matters. The Committee
pays particular attention to matters which it considers to be important as a result of their impact on the Group results and remuneration of management,
or the level of complexity, judgement or estimation in their application on the preparation of the Company’s financial statements.
In considering the Financial Statements for the year ended 31 December 2013, the Committee discussed with the auditors and management all areas
of risk it identified during both the audit planning process and year end audit. In the Committee’s judgement, these areas are usual for a company of
Serco’s size and business model.
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Serco Group plc | Annual report and accounts 2013Directors’ Report The significant issues considered by the Committee during the period were as follows:
Significant issues considered by the Committee
How the issue was addressed by the Committee
1
Onerous contracts – Provisions for future losses on onerous
contracts require an estimate to be made of the future performance
of the given contract. This is based on various interdependent
factors, often outside the direct control of the Group.
2
Goodwill and intangibles impairment – The judgements in
relation to goodwill impairment testing relate to the assumptions
applied in calculating the value in use of the operating
companies being tested for impairment.
3
Defined benefit pension schemes – Changes in the
assumptions applied to the calculation of the defined benefit
retirement scheme balances can have a material impact on
the Financial Statements.
Documentation regarding the UK clinical health contracts was
presented to, and approved by, the Committee. This outlined the
key decisions, both operational and financial, and the proposed
accounting decisions. Following this report, the Committee agreed
the provision made of £17.6m and concluded that due to the material
size and nature of this charge, that it be treated as an exceptional item.
Management prepared a separate paper which included support
for the £9.1m provision for other onerous contracts made in the year.
The Committee challenged the amounts provided for and whether
all contracts requiring provision had been covered.
Following the process outlined above, the Committee was satisfied
that the Group’s provision for onerous contracts is appropriate.
The key assumptions applied in the calculation relate to the
future performance expectations of the business. Business plans
prepared by management supporting the future performance
expectations used in the calculation were approved by both
the Executive Committee and the Board. The Audit Committee
received a detailed report on the outcome of the impairment review
performed by management. The impairment review was also an
area of focus for the external auditors, who reported their findings
to the Committee.
The Committee concluded that the intangible assets were not
impaired and approved the disclosures in the Financial Statements.
The costs, assets and liabilities of the Group’s defined benefit
retirement schemes are considered together with the key
assumptions underlying their calculation. In addition, advice is
sought from independent actuaries and discussions are held with
the external auditors.
The Committee is satisfied that the assumptions made are
appropriate.
4
Exceptional items – Certain items of income and expenditure
require separation from statutory operating profit, to assist the
reader of the Financial Statements to assess the quality of the
profits of the Group. Determining the treatment of such items
requires a level of judgement.
Management prepared documentation in support of the treatment
applied in these Financial Statements, which was reviewed and
challenged by the Committee. This treatment was considered in
light of the guidance issued by the Financial Reporting Council
in December 2013.
5
Disposal accounting – There were three disposals in the year
and the profit/loss on disposal for each of these were identified
as exceptional items in the Income Statement.
The Committee also considered detailed reporting from, and
discussions with, the external auditors on this matter, and
concluded that the items included as “exceptional” are needed
to provide clear and useful information about the trends in the
components of the results of the Group.
The Committee considered the accounting for the businesses
disposed in the year. This included the judgement made in
allocating goodwill to these disposals, associated disposal costs
and a review of the disclosure of these items as exceptional items
in the Income Statement.
6
Intangible assets capitalised – There were additions to
intangible assets of £27.8m in the year covering a number of
software projects and internal development projects, particularly
in Global Technology Delivery.
The Committee reviewed the material items of intangible spend in
the year and assessed whether these had been correctly judged to
have met the capitalisation criteria of IAS 38. This involved a review
of the expected economic benefits.
77
Directors’ Report Audit Committee Report
Internal audit
The Audit Committee has oversight responsibility for the Internal Audit function, and reviews and approves the internal audit programme. It also reviews
and assesses all reports issued, together with management’s actions to respond to findings and recommendations. The Group Head of Internal Audit,
who functionally reports directly to the Chairman of the Audit Committee, is invited to and attends the Audit Committee meetings and is also presented
with the opportunity to meet privately with the Audit Committee without any members of management present.
During 2013, a strategy for strengthening Internal Audit was developed and presented to the Audit Committee and this led to a number of changes
in the Internal Audit function, designed to further enhance the delivery of internal audit and its standing within the Group. Key changes have been
implemented already including the formulation of a single Global Internal Audit team, changing of reporting lines, the rollout of a standard internal audit
methodology, approval of an updated internal audit charter which outlines the objectives, authority, scope and responsibilities of the new group internal
audit function, and the change in administrative reporting lines of the Group Head of Internal Audit to the Group Chief Executive.
External auditors
The Audit Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of external auditors.
Deloitte LLP were re-appointed auditors of the Group at the Annual General Meeting held in May 2013. During the year, the Committee received
and reviewed audit plans and reports from the external auditors. The external auditors also met privately with the Audit Committee without any
member of management or the Executive Directors being present.
Non-audit services
The Committee has reconfirmed its policy on the provision of audit and non-audit services by Deloitte LLP. It determined three categories of services:
Approved (e.g. audit and related assurance services), Permitted (e.g. tax compliance and due diligence) and Not Permitted (e.g. design/implementation
of financial information systems and quasi management services). The Committee, the Company, and Deloitte LLP all monitor compliance with the
policy and review at each meeting the fees earned and the estimates for the year.
The Committee acknowledges that the Group’s external auditors will have a significant understanding of the Group’s business and this knowledge and
experience can be utilised to the Group’s advantage in many areas, thus ensuring efficiency in costs to the Group. They also operate to professional
codes of conduct including the management of conflicts of interest. Accordingly, it considers that the external auditors may be engaged for the following
non-audit services:
a) Assistance in tax compliance activities (including the preparation of tax returns)
b) Tax advisory services
c) accountants’ reports for any Stock Exchange purposes
d) Ad hoc reporting on historic financial information for any other purpose and ad hoc accounting advisory services
e) Due diligence activities associated with potential acquisitions or disposals of businesses
f) Other corporate finance advisory services required in support of potential transactions or bids, including the review of financial models for internal
consistency and compliance with Group financial accounting policies
g) Any other services which are not prohibited and are authorised by the Group Chief Financial Officer or Group Company Secretary.
Where such services are considered to be recurring in nature, approval of the Committee may be sought for the full financial year at the beginning of
that year. Approval for other permitted non-audit services has to be sought on an ad hoc basis: where no Audit Committee meeting is scheduled within
an appropriate time frame, approval is to be sought from the Chairman of the Committee (or his nominated alternate). The Committee may establish
fee thresholds for pre-approved services and similar approvals are required for work awarded to accounting firms other than Company’s auditors,
where fees are expected to exceed pre-approved limits. The Group Company Secretary is nominated by the Audit Committee as the point of review
and approval for the engagement of non-audit services.
The Group has complied with the policy throughout the year. Where appropriate, non-audit services have been provided by companies other than
Deloitte LLP to safeguard auditor objectivity and independence. The fees paid to Deloitte for audit, audit-related and non-audit services for 2013 can be
found in Note 12 to the Consolidated Financial Statements. The principal areas of engagement of Deloitte for audit-related and non-audit services were
commissioned in full compliance with the above policy and a formal tender exercise was undertaken. The services principally related to taxation advice,
IT advisory work and due diligence and other corporate finance advisory services.
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Serco Group plc | Annual report and accounts 2013Directors’ Report Effectiveness of external auditors
During the year, the Audit Committee reviewed the effectiveness of the external audit process. An assessment of the process was undertaken by
each member of the Committee with input received from management associated with the audits undertaken (Group Finance and Divisional Finance
Directors). The assessment covered all aspects of the audit service provided by the audit firm. The Committee also obtained a report on the audit
firm’s own internal quality control procedures and consideration of audit firms’ annual transparency reports.
Audit tendering
The Audit Committee has noted the changes to the Code, the recent findings of the Competition Commission and the Guidance for Audit Committees
issued by the Financial Reporting Council, each in the context of the tendering by audit firms for the external audit contract at least every ten years.
The independence, objectivity and effectiveness of the external auditors have been examined by the Committee and discussions were held regarding
their terms of engagement and remuneration. The Senior Statutory Auditor is Richard Knights, who was appointed to the role at the beginning of 2011.
There are no contractual obligations that restrict the Company’s current choice of external auditor. Following an assessment of the independence,
objectivity and effectiveness of Deloitte LLP, the Committee recommended to the Board that Deloitte LLP be proposed for reappointment at the
forthcoming 2014 Annual General Meeting. This recommendation has been accepted by the Board and will be proposed to shareholders.
The Committee will consider a formal tender process in accordance with the provisions of the UK Corporate Governance Code 2012. It will comply
with the Competition Commission Order relating to the statutory audit market for FTSE 350 companies, which is expected to come into effect from
1 October 2014. Under the transitional arrangements, the Committee expects a formal tender process to be held no later than two years from the end
of the current audit engagement partner rotation period. As partner rotation is due in the year ended 31 December 2015, a tender process is expected
to commence no later than 2016.
The Committee notes and continues to monitor the further developments from the EU Commission in respect of audit regulations that will need to be
reflected in UK law in the next few years. These rules will require listed companies to change auditors after ten years, with the possibility of keeping the
same firm for an additional ten years if the work has been put out to tender.
Malcolm Wyman
Chairman of the Audit Committee
3 March 2014
79
Directors’ Report Nomination Committee Report
Annual statement by the Chairman of the Nomination Committee
The Nomination Committee is responsible for identifying and nominating, for the approval of the Board, candidates to fill Board vacancies as and when
they arise. Before making an appointment, the Committee will evaluate the balance of skills, knowledge and experience on the Board and, in the light of
this evaluation, prepare a description of the role and capabilities required for a particular appointment. The Committee will also make recommendations
to the Board concerning the appointment of any Director or the Company Secretary to the Board and give full consideration to succession planning
in the course of its work, taking into account the challenges and opportunities facing the Company and the necessary skills and expertise required
on the Board.
Where an external recruitment is appropriate, or to benchmark a suitable internal candidate, the Committee will engage the services of an independent
search consultant. In consultation with the chosen search consultant, specifications are drawn up for the roles and for those personal attributes and
experience that are felt to be essential for the effective performance of any new appointment, including for Non-Executive Directors what would be
considered appropriate in terms of time commitment.
The Committee is responsible for a number of other matters relating to the composition of the Board and its committees. In particular it is
responsible for:
●●● Making a statement in the annual report and accounts about its activities; the process used for appointments; the membership of the Committee;
number of Committee meetings held and attendance over the course of the year
●●● Ensuring that on appointment to the Board, Non-Executive Directors receive a formal letter of appointment setting out clearly what is expected
of them in terms of time commitment, Committee service and involvement outside Board meetings.
A copy of the Committee’s full terms of reference are available online at www.serco.com.
Membership and meetings
The Nomination Committee consists of Executive and independent Non-Executive Directors. The majority of members are independent
Non-Executive Directors.
The Committee welcomed the appointment of Mike Clasper to the Committee from March 2014 and the broad range of skills and experience
he brings to complement the current Committee. In addition to Mike, the Committee currently comprises Alastair Lyons, who chairs the Committee,
Malcolm Wyman, Angie Risley and Ed Casey. The Committee met five times during 2013.
The minutes of the Committee meetings are circulated to all directors.
Principal activities during the year
At its meetings during the year, the Committee discharged its responsibilities as outlined above. In particular, one of the key areas of focus in the 2012
Board effectiveness review was to enhance the profile of the Board through greater diversity. During the year, the Committee conducted a thorough
process of search to identify three additional Non-Executive Directors, in order to complement the existing non-executive members of the Board and
these were proposed for appointment and approved by the Board in 2014. With these appointments, a third of the Board is now female.
The Committee also dealt with succession planning for the role of Group Chief Executive following Christopher Hyman’s resignation from the Board
in October: this completed with the announcement of Rupert Soames’ appointment in February 2014.
The Committee engaged the Zygos Partnership, an independent external executive search consultancy, for the recruitment of the new Non-Executive
Directors, and for the position of Group Chief Executive. The Board confirms the Zygos Partnership is not connected with the Company in any way.
Diversity
The Board strongly supports the principle of boardroom diversity, recognises the benefits of having diversity across all areas of the Group and believes
this adds to Serco’s continued success and advantage. The Board will always seek to appoint on merit against objective criteria, including diversity.
When considering the optimum composition of the Board, the benefits of diversity of the Board are appropriately reviewed and balanced where
possible, including in terms of differences of skills, industry experience, approach, gender, race, age, nationality, background and other contributions
that individuals may bring. The Committee continues to focus on encouraging diversity of thought and experience, recognising that Directors with
diverse skill sets, capabilities and experience gained from different geographic and cultural backgrounds enhance the Board. In addition to Board
diversity, the Company believes in promoting diversity at all levels of the organisation and has stated an aim to achieve appropriate diversity across
all elements of Serco’s management. As highlighted earlier in the Corporate Governance Report, the Board has an increased focus on the balance
of women in senior executive positions in the organisation, in order to provide opportunities for talented women to become directors, both executive
and non-executive. At present 12.5% of our senior managers are female and the Board will be seeking to increase this over time.
Alastair Lyons CBE
Chairman of the Nomination Committee
3 March 2014
80
Serco Group plc | Annual report and accounts 2013Directors’ Report Corporate Responsibility Committee
Under the Corporate Renewal Programme, the Board committed to establish a Corporate Responsibility Committee which will be responsible for
overseeing the Company’s approach to all aspects of Corporate Responsibility, including its ethics and business conduct; the structure of governance;
its approach to health and safety; its contribution to the communities in which its people live and work; its impact on the environment in which the
Company operates; its approach to managing its relationships with customers, suppliers and other parties; and its risk management framework.
The terms of reference for the Committee were designed during 2013 and formally approved in February 2014.
The full terms of reference of the Committee are available online at www.serco.com.
Membership and meetings
The Corporate Responsibility Committee consists of Executive and independent Non-Executive Directors. The majority of members are independent
Non-Executive Directors.
The Committee welcomed the appointment of Mike Clasper, Tamara Ingram and Rachel Lomax to the Committee from March 2014 and the broad range
of skills and experience they bring to it. Rachel chairs the Committee and in addition to Mike and Tamara, the Committee comprises of Alastair Lyons,
and Ed Casey. The Committee will meet not less than four times a year. The Committee did not meet during 2013.
The minutes of the Committee meetings will be circulated to all directors.
Principal activities during the year
The Committee held its first meeting in February 2014, which was chaired by Alastair, at which the terms of reference were approved and formally
presented to the Board.
81
Directors’ Report Remuneration Report
Dear Shareholder
On behalf of your Board, I am pleased to present our Directors’ Remuneration Report for the year ended 31 December 2013.
The Remuneration Committee continues to recognise the clear link between pay and performance and provides information on this in the Report by way of
additional disclosures on our reward and on our remuneration decisions in line with the recommendations of the UK Corporate Governance Code and
the requirements of the UKLA Listing Rules. This Report also complies with the provisions of the Companies Act 2006 and the Large and Medium-sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Regulations).
We have structured the Report into two sections:
1. Directors’ Remuneration Policy setting out all elements of our Company’s remuneration policy and the key factors that were taken into account in setting
that policy. This policy is subject to a binding shareholder vote at this year’s General Meeting on 8 May and thereafter at least every third year;
2. Annual Report on Remuneration setting out payments and awards made to our directors and details on the link between Company performance and
remuneration for the financial year covered by the accounts. This report on remuneration together with this letter is subject to an advisory shareholder
vote at the General Meeting on 8 May.
2013 Overview
As reported in the Strategic Review (pages 2 to 59), we have been through a very difficult and extremely unusual period since July of last year, which has
had a major impact on the Company by reducing near-term growth, diverting management focus, and adding costs in order to strengthen the business.
Whilst the impact will continue to be significant in 2014 as we implement the programme of corporate renewal and rebuild our UK pipeline, the notification
by the UK Government in January that a positive assessment has been made of our corporate renewal plan will now allow the business to begin to emerge
in a stronger position to compete in its large and growing markets and rebuild value for shareholders. Recognising the need for strong and effective
leadership, I am delighted with the appointment of Rupert Soames as our new Group Chief Executive with effect from 1 June 2014. Also the range of skills
and experience of our current Board will be complemented by the addition of three new Non-Executive Directors one of whom, Tamara Ingram, will join
the Remuneration Committee.
Remuneration outcomes in respect of 2013
During 2013 Christopher Hyman resigned as Group Chief Executive and Ed Casey took on the role of Acting Group Chief Executive. As communicated
at the time, and as described elsewhere in this Report, Chris only received his contractual entitlement of 12 months payment in lieu of notice, paid on
a phased basis and subject to mitigation. He was allowed to retain the 2011 Performance Share Plan (PSP) and Deferred Bonus Plan (DBP) awards
that were due to vest within his notice period. However, as the threshold performance conditions for these awards were not met, they lapsed entirely
and so no payment was made.
Ed was appointed Acting Group Chief Executive in October 2013 on a salary of USD1,046,000, with a pension supplement of 30% of salary. His short and
long-term incentives are in line with our normal policy for the Group Chief Executive. His bonus for the period since his appointment in October 2013
has been based on a combination of financial KPIs, in large part reflecting the performance of our US business which he had led for 10 months of
the year, alongside non-financial objectives relating to his role as Acting Group Chief Executive. Our US business has had a strong year and Ed has made
an outstanding contribution as Acting Group Chief Executive, rapidly getting to grips with our corporate renewal plan, demonstrating strong leadership in
a time of great instability, and showing great personal flexibility. On the basis of this performance, a bonus award of 111% has been determined for
him for his period since appointment in October 2013. Andrew Jenner, our Group Chief Financial Officer, has elected not to take a bonus in respect of
2013 in recognition of the significant impact of events during the year on Serco’s performance and share price. Serco’s financial performance for
the year is described in more detail in the Strategic Report starting on page 2.
As a consequence of our financial performance falling short of where we wanted it to be, the long-term incentive awards made under the PSP
and DBP in 2011, and due to vest in 2014 based on 2013 results, will lapse as we were below median against our peer group on a relative Total Shareholder
Return basis and EPS growth fell short of the threshold of 9% pa compound.
These outcomes clearly demonstrate that our remuneration policy is effective in aligning pay with performance.
Remuneration for 2014
The Committee conducted its regular annual review of salaries of the Executive Directors, taking into account the challenges that have faced the business
last year, their performance, the competitiveness of their remuneration against the UK market and the current economic climate. The Committee also has
regard to the overall pay decisions for employees across the Group as a whole. With effect from 1 April 2014, the salaries for the Executive Directors will
increase by 1.5% to USD1,061,690 for the Acting Group Chief Executive and £463,855 for the Group Chief Financial Officer.
Rupert Soames has been appointed on a base salary of £850,000, with a first review date of 1 April 2016, and will receive a pension supplement of 30%
of salary. His incentives are in line with our current remuneration policy, as set out in this Report, and which will be put to shareholders for approval under
the binding vote at the 2014 General Meeting. In order to compensate him for awards he will forgo at Aggreko as a result of joining Serco, Rupert will
also receive an initial one-off long-term incentive award of 150% of salary under the PSP and an award of shares vesting over the period to 1 April 2017.
The performance conditions on the one-off PSP award will be relative TSR, Share Price (both tested following the announcement of the 2016 results) and
strategic objectives. Any Aggreko awards that have performance conditions attached will be replaced with Serco awards with performance conditions.
82
Serco Group plc | Annual report and accounts 2013Directors’ Report Under our corporate renewal plan, we have committed to review the Group’s variable incentivisation structures for the leadership such that they support
the process of behavioural change and ensure there is a commitment to do what is right and to deal with our customers fairly and transparently beyond
merely the achievement of financial measures. Changes to our leadership bonus plan have already been agreed for 2014 to reflect this objective.
For 2014, performance measures in respect of the bonus for Executive Directors will be based 50% on financial metrics and 50% on non-financial metrics
related to implementing our corporate renewal plan, stabilising our business and providing clarity of leadership and direction. For the 2014 policy, we have
decided to make the following changes to improve the alignment of our remuneration with long-term shareholder interests and sustained performance:
●●● We have introduced a two-year holding period post-vesting for shares under the PSP, and
●●● We have introduced malus provisions pre-vesting for the PSP and DBP, and claw back during the holding period for PSP awards.
We will keep our remuneration under review to ensure it remains strongly linked to the strategy and we will, therefore, during 2014 conduct a fuller review
of incentives and of our remuneration policy. It is, therefore, possible that changes will be made for 2015, and a further binding policy vote in 2015 may
be required.
Shareholder engagement
The Committee will engage as appropriate with our shareholders and key shareholder bodies during any policy review undertaken during 2014.
In the short term we will also be consulting on the appropriate targets to apply to our long-term incentives for 2014 awards ahead of the
Annual General Meeting.
I, and the Committee believe it is important to continue to maintain effective channels of communication with our shareholders. The Committee takes the
views of shareholders very seriously and these views have been influential in shaping our policy and practice.
The voting outcome at the 15 May 2013 General Meeting in respect of the Director’s Remuneration Report for the year ending 31 December 2012 is set
out on page 102 and reflected very strong shareholder support for the Company’s remuneration policy.
We welcome shareholder feedback on any aspects of executive remuneration.
In summary, it has been an extraordinarily difficult time for Serco over the last 8 months. I believe that in making the necessary decisions the Remuneration
Committee has rigorously sought to ensure that reward is clearly linked to performance and shareholder interests; that no payment is made for failure or
loss of office; and that the reward for Rupert Soames as our new Group Chief Executive is positioned appropriately to attract someone of his leadership
capability and commercial track-record, both of which are critical for Serco’s future success.
Angie Risley
Chair of Remuneration Committee
3 March 2014
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Directors’ Report Remuneration Report
At a glance: implementation of remuneration policy for 2014 and key decisions for 2013
The table below summarises how key elements of the remuneration policy will be implemented in 2014 and key decisions taken by the
Remuneration Committee in relation to base pay and incentives for Executive Directors in respective of 2013 year-end. EPS targets will
be determined before the General Meeting on 8 May 2014 and following consultation with Serco’s major investors.
Element
Acting CEO (Ed Casey)
CFO (Andrew Jenner)
Base salary from 1 April 2014
$1,061,690
Pension
Annual bonus
Annual bonus measures
Deferred Bonus Plan (DBP)
30% of salary including cost of
participation in US 401K plan
Max
On-target 75% of salary
150% of salary
£463,855
33% of salary
Max
On-target 65% of salary
130% of salary
●●● 50% financial targets including revenue, PBT, Free Cash Flow
●●● 50% non-financial targets from programme of corporate renewal. The weighting has been
increased to reflect the importance of the corporate renewal priorities for 2014.
Maximum of 50% of earned bonus can be deferred to purchase investment shares,
each individual investment share purchased will be matched (on a gross investment basis)
by a maximum of two ‘matching’ shares.
DBP measures
EPS is the sole measure to determine the vesting of matching shares measured over three years.
Performance Share Plan (PSP)
Maximum 200% of salary
Maximum 175% of salary
PSP measures
Measured over three years with one-third each on:
●●● relative TSR measured against the companies in the FTSE 51 to 130
(excluding investment trusts),
●●● 2016 EPS
●●● Share Price
Relative TSR will be measured from a base-point of the average over the 30 days to
4 March 2014 and the end point for both Relative TSR and Share Price will be measured
over the 30 days following announcement of the 2016 results.
Performance
Relative TSR
Share price
2016 EPS
Vesting
Threshold
Maximum
25%
100%
Median
Upper Quartile
Targets to be confirmed
ahead of General Meeting
Holding requirement
Vested shares from the PSP to be held for two years post vesting (after payment of tax)
Shareholding requirement
200% of salary
150% of salary
Malus and clawback
●●● Malus provisions will apply to PSP and DBP awards during the three-year performance
period prior to vesting
●●● Clawback provisions will apply during the two-year post-vesting holding period to shares
arising from PSP awards.
●●● Weighting of non-financial targets increased from 20% to 50%
●●● Two-year holding period introduced on PSP awards
●●● Pre-vesting malus introduced for PSP and DBP
●●● Post-vesting claw-back introduced for the two year holding on PSP
Changes in policy from 2013
Year-end decisions made
Executive Directors
1 April 2014 salary review
1.5%
1.5%
2013 Bonus outcome:
●●● Currency value
●●● % of salary
●●● % of maximum
2011 LTIP vesting
2011 DBP vesting
Non-Executive Directors
$216,734
111%
74%
Nil
N/A
Bonus waived
Nil
Nil
Nil
Nil
Non-Executive Directors Fees:
Chairmanship
Membership
Audit Committee
£12,500 (no change)
Corporate Responsibility Committee
£15,000
Nomination Committee
–
Remuneration Committee
£10,000 (no change)
£5,000
£8,000
–
£5,000
84
Serco Group plc | Annual report and accounts 2013Directors’ Report Directors’ Remuneration Policy
The following report details the remuneration policy and the decisions on remuneration of the Directors of the Group for the year ended 31 December
2013. This report has been drafted in compliance with the disclosure requirements of the UK Corporate Governance Code and the requirements of
the UKLA Listing Rules. This Report also complies with the provisions of the Companies Act 2006 and the Large and Medium-sized Companies and
Groups (Accounts and Reports) (Amendment) Regulations 2013 (Regulations).
The remuneration policy report is subject to a binding vote at the 2014 AGM and if approved will take effect from 8 May 2014 and will apply until
Shareholders next consider and vote on the Policy.
The directors’ remuneration policy will be displayed on the company’s website, in the investor area, after the 2014 AGM.
Remuneration Policy
Serco’s remuneration policy supports the achievement of the Company’s long-term strategic objectives. Serco’s approach to executive remuneration
is designed to:
●●● Support Serco’s long-term future growth, strategy and values
●●● Align the financial interests of executives and shareholders
●●● Provide market competitive reward opportunities for performance in line with expectations and deliver significant financial rewards for sustained
out-performance
●●● Enable Serco to recruit and retain the best with the required skills and experience in all our chosen markets
●●● Be based on a clear rationale which participants, shareholders and other stakeholders are able to understand and support.
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Directors’ Report Remuneration Report
Future policy table
The remuneration package for Executive Directors consists of base salary, annual bonus, long-term share-based incentives, pension and other benefits.
The Company’s policy is to ensure that a significant proportion of the package is related to performance.
The following table sets out each element of reward and how it supports the Company’s short and long term strategic objectives. Whilst the table
is focused on Executive Directors, the table set out on page 90 provides further information of how pay policies are set for the broader employee
population.
How the element
supports our
strategic objectives
Operation of
the element
Maximum potential
value and payment
at threshold
Performance metrics
used, weighting and
time period applicable
Base Salary
To help recruit and retain
executives of the necessary
calibre to execute Serco’s
strategic objectives and to
recognise an individual’s
experience, responsibility and
performance.
To ensure base salaries are
competitive in the market in
which the individual is employed.
Benefits
To provide a competitive level
of benefits.
None
Over the policy period, base
salaries for Executive Directors
will be set at an appropriate level
within the peer group and will
normally increase at no more
than the greater of inflation
and salary increases made to
the general workforce in the
jurisdiction the Executive Director
is based in.
Higher increases may be made
in exceptional circumstances, for
example when there is a change
in role or responsibility.
None
The maximum opportunity for
benefits is defined by the nature
of the benefits and the cost of
providing them. As the cost of
providing such benefits varies
based on market rates and
other factors, there is no formal
maximum monetary value.
Pay levels are designed to be
competitive and fair and reflect
the skills and performance
of individuals.
Salaries are benchmarked from
time to time against salaries
for the Company’s relevant
peer group, with the market
positioning dependent on the
scale of challenges intrinsic
to the individual’s role and
individual’s ability, experience
and role. In some circumstances
there may be phased movement
to that positioning.
Salaries are reviewed annually
and any changes are effective
from 1 April in the financial year.
Serco pays the cost of providing
the benefits on a monthly
basis or as required for one-off
events such as receiving
financial advice.
These include but are not limited
to car allowances, private
medical insurance, permanent
healthcare insurance, life
cover, annual allowance for
independent financial advice,
and voluntary health checks
every two years.
Relocation benefits will be
provided in a manner that reflects
individual circumstances and
Serco’s relocation benefits
policy. For example, relocation
benefits could include temporary
accommodation for the
Executive and dependents and
tax equalisation.
Benefits are reviewed annually
against market practice and are
designed to be competitive.
86
Serco Group plc | Annual report and accounts 2013Directors’ Report How the element
supports our
strategic objectives
Operation of
the element
Maximum potential
value and payment
at threshold
Performance metrics
used, weighting and
time period applicable
Annual Bonus
Incentivise executives to achieve
specific, predetermined goals
during a one-year period.
Reward ongoing stewardship
and contribution to core values.
Maximum bonus opportunity:
150% of salary for CEO
130% of salary for CFO
On-target bonus:
75% of salary for CEO
65% of salary for CFO
Threshold bonus is 20% of
maximum bonus opportunity.
Bonus result is determined by
the Committee after the year end,
based on performance against
objectives and targets.
Annual bonuses are paid after
the end of the financial year end
to which they relate. There is
an optional deferral of 50%
of the total earned bonus into
Serco shares.
On change of control the
Remuneration Committee may
pay bonuses on a pro-rata basis
measured on performance up to
the date of change of control.
Bonus is earned on the basis of
achievement of a mix of financial
and non-financial objectives of
which at least 50% are financial.
Financial measures are based on
the Company’s Key Performance
Indicators (KPIs) and the non-
financial measures are based
on key strategic objectives.
Performance is measured over
the financial year.
The Committee has discretion
to vary the weighting of
performance metrics over the life
of this remuneration policy. Also
the Committee has discretion
in exceptional circumstances
to vary performance measures
part-way through a performance
year if there is a significant event
(such as a major transaction or
transition in role) which causes
the Committee to believe the
original performance conditions
are no longer appropriate.
Deferred Bonus Plan (“DBP”)
This plan is to incentivise
executives to achieve superior
returns for shareholders and
to align executives to
shareholder interests.
Executive Directors can elect to
defer, for three financial years, up
to 50% of their annual bonus by
purchasing investment shares.
Each individual investment
share purchased will be
matched (on a gross investment
basis) by a maximum of two
‘matching’ shares.
Dividends are reinvested and
distributed only in respect
of shares that vest at the end
of the performance period.
The Committee, at its discretion
may attach a post-vesting
holding period for awards.
In circumstances such as fraud,
misconduct and/or misstatement
by a participant, the Company
will be entitled to withhold before
the vesting date the value of
any shares to be released or the
payment of cash equivalents
under the DBP.
On a change of control awards
vest pro-rata for time and
performance up to the date of
change of control unless the
Committee decides otherwise.
As provided in the plan rules
approved by shareholders, the
Committee has discretion to
adjust awards in the event of, for
example, corporate restructuring
or capital events.
For maximum performance, each
investment share is matched by
two matching shares.
Earnings Per Share (“EPS”) is the
sole measure to determine the
vesting of matching shares.
For threshold performance each
investment share is matched by
half a matching share.
The performance condition is
measured over three years.
In exceptional circumstances the
Committee retains discretion to
change performance measures
and targets and the weightings
attached to performance
measures part-way through the
performance period if there is
a significant event (for example
a major transaction) which
causes the committee to
believe the original measures,
weightings or targets are
no longer appropriate.
The Committee has discretion to
vary the proportion of awards that
vest, to ensure that the outcomes
are fair and appropriate and
reflect the underlying financial
performance of the Group.
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Directors’ Report Remuneration Report
How the element
supports our
strategic objectives
Operation of
the element
Maximum potential
value and payment
at threshold
Performance metrics
used, weighting and
time period applicable
Performance Share Plan
(“PSP”)
Awards of nominal cost options/
conditional shares made annually.
To drive achievement of longer
term objectives, increase
shareholder value aligned
closely to creating shareholders’
interests.
Pension
To provide funding for retirement.
Dividends are reinvested and
distributed only in respect
of shares that vest at the end
of the performance period.
The Committee, at its discretion,
may attach a post-vesting
holding period for awards.
In circumstances such as fraud,
misconduct and/or misstatement
by a participant, the Company
will be entitled to withhold before
the end of the holding period
the value of any shares to be
released or the payment of cash
equivalents under the PSP.
On a change of control awards
vest pro-rata for time and
performance up to the date
of change of control unless the
committee decides otherwise.
As provided in the plan rules
approved by shareholders,
the Committee has discretion
to adjust awards in the event
of, for example, corporate
restructuring or capital events.
Executive Directors may
participate in tax-approved
pension plans operated by
the Company.
A cash allowance is available
for those not participating in
a pension scheme or whose
participation exceeds one
or more tax allowances.
Shareholding Requirement
To support long-term
commitment to the Company
and the alignment of employee
interests with those of
shareholders.
Unvested performance shares
or options are not taken into
account. Share price is measured
at end of each financial year.
Executives are required to
retain in shares 50% of the
net value of any performance
shares vesting or options
exercised until they satisfy
the shareholding requirement.
88
Vesting is dependent on at least
two performance conditions
chosen from:
●●● EPS
●●● Relative TSR
●●● Share Price or absolute TSR
The measures are independent,
and are measured over three
years. The weighting of each
is determined prior to award.
The Remuneration Committee
has discretion to adopt other
measures following consultation
with major shareholders.
In exceptional circumstances the
Committee retains discretion to
change performance measures
and targets and the weightings
attached to performance
measures part-way through the
performance period if there is a
significant event (such as a major
transaction) which causes the
committee to believe the original
measures, weightings or targets
are no longer appropriate.
The Committee has discretion to
vary the proportion of awards that
vest, to ensure that the outcomes
are fair and appropriate and
reflect the underlying financial
performance of the Group.
None
None
Face value on grant of 200%
of base salary for the CEO
and 175% for the CFO.
25% of the award vests for
threshold performance.
Since 2010, Andrew Jenner
ceased accruing benefits in the
pension scheme and has been in
receipt of a cash allowance equal
to 33% of base salary in lieu of
further pension provision.
Andrew remains entitled to
lump sum and widow’s pension
benefits should he die before
retirement and while still
employed by Serco.
Ed Casey participates in the
US 401k pension and receives
a cash allowance in lieu of
pension equal to 30% of
base salary less the cost of
participation in the US 401k plan.
CEO – 200% of salary
CFO – 150% of salary
The Committee has the
discretion to increase the
shareholding requirements
of the Executive Directors.
Serco Group plc | Annual report and accounts 2013Directors’ Report
Notes to the policy table:
Performance measures and targets
The table below sets out a rationale for the performance conditions chosen for annual bonus, Deferred Bonus Plan and Performance Share Plans
and how targets were set.
Element
Performance measures
and rationale
How targets are set
Annual bonus
●●● Financial and non-financial performance
Deferred Bonus Plan
measures.
●●● The Committee selected the financial
measures based on the Company’s Key
Performance Indicators (KPIs) and the
non-financial measures were individually
set and based on key strategic goals.
●●● EPS is the sole measure
to determine the vesting
of matching shares.
●●● The Committee selected EPS as
it is a key performance indicator
both for the Company and its
major shareholders.
●●● The Committee believes EPS can
be directly influenced by executive
decision-making while also reflecting
shareholder value.
Performance Share Plan
●●● EPS, Relative TSR and Share Price or
absolute TSR.
●●● As set out above EPS is an important
measure of shareholder value which
can also be influenced by executive
decision making.
●●● Relative TSR reflects our performance
relative to other companies in which
investors could chose to invest.
●●● The rationale for the share price
measure is explicitly to recognise the
recent falls in share price and to ensure
that the full award is not delivered
unless shareholders benefit from
a significant recovery in value over
the next three years.
●●● The performance targets are determined
annually by the Committee taking into
account analyst consensus and the
Company’s forecasts.
●●● EPS targets are set in reference to
analyst forecasts, Company business
plans, and levels of EPS required
to support our share price goals.
●●● Share price targets will be set to reflect
what the Committee determines as
stretching, taking into account the
recent fall in share price and historic
share price levels, but also what is
realistic and consistent with achievable
levels of financial performance.
●●● The Committee consults with a
selection of the largest shareholders
and the voting guidance services when
determining targets for the Company’s
LTI arrangements.
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Directors’ Report Remuneration Report
Remuneration policy for other employees
The remuneration policy described in the previous table applies specifically to Executive Directors of the Group. The Committee believes that the
structure of management reward at Serco should be linked to Serco’s strategy and performance. The table below explains how the remuneration
policy has been cascaded below Executive Directors to achieve alignment of policy across the organisation.
Element
Base salary
Benefits
Pension
Annual bonus
Difference in remuneration policy for other employees
The same principles and considerations that are applied to Executive Directors are,
as far as possible, applied to all employees.
Serco also has provisions for market aligned benefits for all employees.
The Group operates a number of defined benefit schemes and defined contribution
schemes. Individuals who have exceeded certain tax allowances may be offered cash
allowances in lieu of pension benefits.
Approximately 600 members of the Global Leadership Team are eligible for a bonus award
under The Leadership Team Bonus Scheme.
Deferred Bonus Plan (“DBP”)
Members of the Executive Committee are invited to participate in the DBP on the same
terms as the Executive Directors.
Performance Share Plan (“PSP”)
The PSP is awarded to approximately 600 employees in the Global Leadership Team.
Sharesave
An all-employee scheme. Options are normally granted at a discount of 10% to the
market value and have no performance conditions. The Executive Directors do not
participate in Sharesave.
Considerations of conditions elsewhere in the Group
Although the Committee does not consult directly with employees on the Directors’ Remuneration Policy, the Committee does consider the general
base salary increase, remuneration arrangements and employment conditions for the broader employee population when determining the remuneration
policy for the Executive Directors.
90
Serco Group plc | Annual report and accounts 2013Directors’ Report Illustrations of application of the Remuneration Policy
The charts illustrate the composition and value of the different elements of remuneration that the Executive Director’s will receive for below threshold,
target and maximum corporate performance.
The graphs show an estimate of the remuneration that could be received by Executive Directors under the Policy set out in this Report. Each of the bars
is broken down to show how the total under each scenario is made up of fixed elements of remuneration, the annual bonus and share-based incentives.
The charts indicate that a significant proportion of both target and stretch pay is performance-related. For ‘target’ performance – variable pay accounts
for nearly two-thirds of total pay for the Acting Group Chief Executive, and over half for the Group Chief Financial Officer.
Acting Group Chief Executive
Proportion of remuneration package value delivered through
fixed and performance-related pay for the Acting CEO (%)
Potential value of the Acting CEO’s 2014 remuneration
package ($000)
100
80
60
40
20
0
100%
40%
22%
38%
32%
56%
24%
20%
8,000
6,000
4,000
2,000
0
32%
3,716
1,593
1,375
1,460
796
1,395
1,395
Below threshold
Target
Maximum
Below threshold
Target
Maximum
●●Fixed elements of remuneration ●●Annual variable ●●●Multiple period variable
●●Fixed elements of remuneration ●●Annual variable ●●●Multiple period variable
Group Chief Financial Officer
Proportion of remuneration package value delivered through
fixed and performance-related pay for the CFO (%)
Potential value of the CFO’s 2014 remuneration package
(£000)
100
90
80
70
60
50
40
30
20
10
0
100%
36%
19%
45%
32%
52%
22%
26%
3,000
2,500
2,000
1,500
1,000
500
0
557
302
689
689
32%
1,415
603
689
Below threshold
Target
Maximum
Below threshold
Target
Maximum
●●Fixed elements of remuneration ●●Annual variable ●●●Multiple period variable
●●Fixed elements of remuneration ●●Annual variable ●●●Multiple period variable
Notes: The scenarios in the above graphs are defined as follows:
Fixed elements
of remuneration
Below Threshold
Target performance
Maximum performance
Base salary as at 1 April 2014
Estimated value of benefits provided under the remuneration policy
Cash allowance in lieu of pension 33% of salary for CFO
Cash allowance in lieu of pension 30% of salary for Acting CEO less the cost of participation in the US 401k plan
Ed Casey’s fixed elements of pay are converted into GBP with an exchange rate of GBP1 = USD1.609
Annual bonus
(payout as a % of salary)
Deferred Bonus Plan
Performance Share Plan
(as a % of face value)
0%
Nil
Nil
75% Acting CEO
65% CFO
150% Acting CEO
130% CFO
1:1 Matching Shares1
2 Matching Shares1
50%1
100%1
1The LTI values reflect target and maximum vesting of the proposed 2014 award. Share price movement or dividend equivalent has not been incorporated into the above figures.
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Directors’ Report Remuneration Report
Approach to Recruitment Remuneration
Serco operates in diverse markets and geographies and many of its competitors for talent are outside the UK. In the event of hiring a new Executive
Director, the Committee will typically align the remuneration package with the above Remuneration Policy, which provides for a maximum total incentive
under bonus, PSP and DBP combined of 500% of salary in any one year (assuming maximum bonus, maximum investment in the DBP and maximum
achievement of all performance conditions). This is the maximum level of incentives excluding buy-outs that will apply to new recruits. Different
performance conditions may apply for new recruits from those set out in the policy, depending on the particular circumstances at the time (which
could, for example, include the appointment of an interim Executive Director).
In determining appropriate base salary on hiring a new Executive Director, the Committee will take into account all factors it considers relevant
including their experience and calibre, current total remuneration, levels of remuneration for companies in the Committee’s chosen peer group,
and the remuneration required to attract the best candidate for Serco. The Committee will seek to ensure that the arrangement is in the best
interests of the Company and its shareholders without paying more than is necessary. New promotes or recruits to the board may on occasion
have their salaries set below the targeted policy level while they become established in their role. In such cases, salary increases may be higher
than inflation or the general UK workforce increase until the targeted market positioning is achieved.
Where it is necessary to compensate a candidate for entitlements and/or unvested long-term incentive awards from an existing employer that are
forfeited, the Committee will seek to match the quantum, structure and timeframe of the award with that of the awards forfeited. In determining the
form and quantum of replacement awards, the Committee will consider whether existing awards are still subject to performance requirements and the
extent to which those are likely to be met, with the aim of providing an opportunity of broadly equivalent value. The principle will be to seek to replace
awards that remain significantly at risk for performance at the candidate’s current employer with awards subject to performance at Serco and to seek
to make any other replacement awards in the form of Serco shares, subject to appropriate vesting or holding requirements. Any compensation for
awards forfeited is not taken into account in determining the maximum incentive award level.
The recruitment policy also includes the additional provision of benefits in kind, pensions and other allowances, such as relocation, education and
tax equalisation in line with Serco policies as may be required in order to achieve a successful recruitment. The policy for recruitment also includes
benefits that are either not significant in value or are required by legislation. It is anticipated that any new Executive Director would be offered
a pension allowance equal to 30% of base salary in lieu of pension.
Where a new Executive Director is an internal promote, the Committee reserves discretion to allow the new Executive Director to continue to benefit
from existing awards granted, or benefit entitlements (such as pension) prior to appointment to the Board.
The policy on the recruitment of new Non-Executive Directors is to apply the same remuneration elements as for the existing Non-Executive Directors.
It is not intended that day rates or benefits in kind be offered, although in exceptional circumstances such remuneration may be required in currently
unforeseen circumstances.
The Committee will include in future Annual Reports details of the implementation of the Policy in respect of any such recruitment to the Board.
Element of remuneration
Maximum percentage of salary
Maximum variable pay:
normally comprising:
●●● Annual bonus
●●● Long-term incentives
Pension allowance
500%
150%
350%
30% cash allowance in lieu of pension
Note: Maximum percentage of salary for annual bonus and long-term incentives excludes compensation for awards forfeited.
92
Serco Group plc | Annual report and accounts 2013Directors’ Report
Service contracts and loss of office payments
The policy for service contracts for new Directors is shown in the table below. Existing Directors have service contracts entered into before 27 June 2012
which have aspects that differ from policy as highlighted underneath the table. The Committee may under this policy at any time, with the agreement of a
Director, alter aspects of their existing contracts so that they are in line with the policy for new Directors. Copies of the directors’ service contracts and letters
of appointment are available for inspection at the Company’s registered office. The date of appointment for each Director is shown in the table below.
Provision
Detailed terms
Notice period
●●● 12 months’ notice from the Company
●●● 12 months’ notice from the Director
Termination payment
●●● Payment in lieu of notice comprising:
• Base salary
• Pension allowance
• Selected benefits
●●● All of the above would be paid in instalments in accordance with the Director’s contractual payment
schedule, subject to an obligation on the part of the Director to mitigate his loss such that payments
will either reduce or cease completely, in the event that the Director gains new employment/remuneration.
In the event of a compromise or severance agreement, the Committee may make payments it considers
reasonable in settlement of potential legal claims. It may include in such payments reasonable
reimbursement of professional fees incurred by the Director in connection with such agreements
and reasonable payments in respect of restrictive undertakings.
●●● The Remuneration Committee may agree that if a Director steps down from the Board then for
a transitional period notice (including payment in lieu of notice) would continue to be based on the
equivalent of up to twelve months’ notice based on their rate of salary and benefits while a Director,
payable in instalments and subject to mitigation.
●●● The reimbursement of repatriation costs or fees for professional or outplacement advice may also be
included in the termination package, as deemed reasonable by the Committee, as may the continuation
of benefits for a limited period.
Treatment of annual bonus on
termination under plan rules
●●● No payment unless employed on date of payment of bonus except for ‘good leavers’: defined as death,
disability, redundancy and other circumstances at the Committee’s discretion.
●●● ‘Good leavers’ are entitled to a bonus pro-rated to the period of service during the year, subject to the
outcome of the performance metrics and paid at the usual time.
●●● The Committee has discretion to reduce the entitlement of a ‘good leaver’ in line with performance
and the circumstances of the termination.
Treatment of unvested
performance shares or options
and unvested matching deferred
share awards on termination
under plan rules
●●● All awards lapse except for ‘good leavers’: ill-health, injury or disability, death, redundancy, retirement,
change of control (as defined in the plan rules) and other circumstances at the Committee’s discretion
(to the extent that they allow ‘good leaver’ treatment for particular awards).
●●● For ‘good leavers’ vesting is pro-rated on a time basis and is dependent on the achieved performance
over the performance period.
Change of control
Exercise of discretion
●●● The Committee has the discretion to vary the level of vesting to reflect the individual performance, and
may, depending on the circumstances of the departure allow some awards to vest while lapsing others.
●●● Where the Director leaves the Company following a change of control, whether or not he is dismissed
or he elects to leave on notice, he will be entitled to receive a payment equivalent to up to one year’s
remuneration.
●●● Intended only to be used to prevent an outcome that is not consistent with performance.
The Committee’s determination will take into account the particular circumstances of the
Executive Director’s departure and the recent performance of the Company.
NEDs
●●● Appointed for initial three-year term.
●●● Appointment may be terminated on three months’ written notice.
●●● All NEDs are subject to annual re-election.
●●● No compensation or other benefits are payable on early termination.
Notes:
Contractual terms for current Directors existing before 27 June 2012 and not subsequently amended have principal areas that deviate from the policy above as follows:
●● In respect of Andrew Jenner, the notice period from the Director is six months and in the event of Change of Control notice reduces to one month in the six months
following the date of the Change of Control.
●● In respect of Ed Casey, the notice period is six months from the Company and two weeks from the Director.
●● In respect of Andrew Jenner and Ed Casey, there are no clauses for termination payments to be paid in instalments or for such payments to be mitigated.
Whilst unvested Awards will normally lapse, the Committee may in its absolute discretion allow for Awards to continue until the normal vesting date and be satisfied,
subject to achievement of the performance conditions. In such circumstances, Awards vesting will normally be prorated on a time apportioned basis, unless the
Committee determines otherwise.
Any such discretion in respect of leavers would only be applied by the Committee to ‘good leavers’ where it considers that continued participation is justified, for example,
by reference to past performance to the date of leaving, or by the requirement to achieve an orderly transition. The claw back provisions would continue to apply in the
event that such discretion were exercised.
Service contracts outline the components of remuneration paid to the individual but do not prescribe how remuneration levels may be adjusted from year to year.
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Directors’ Report Remuneration Report
The Chairman and Non-Executive Directors’ Fees
In accordance with the Company’s policy, the fees of the Chairman and the Non-Executive Directors, which are determined by the Board, are set
at a level which is designed to attract individuals with the necessary experience and ability to make a substantial contribution to the Group’s affairs.
How the element
supports our strategic
objectives
To attract Non-Executive
Directors with the necessary
experience and ability to make
a substantial contribution to
the Group’s affairs.
Operation of
the element
Maximum potential
value and payment
at threshold
Performance metrics
used, weighting and
time period applicable
Non-Executive Director fees are
not performance related.
Over the policy period, base
fees for current Non-Executive
Directors will be set at an
appropriate level within the peer
group and increases will typically
be broadly in line with market.
The base fees or fees for
specific Non-Executive Directors
roles may be reviewed at any
time based on the anticipated
responsibility and time
commitment involved.
Current fee levels are shown in
the section on implementation
of policy.
The fees of the Chairman are
determined and approved by
the Remuneration Committee
(excluding Chairman) and fees
of the Non-Executive Directors,
are determined and approved
by the Board as a whole.
The Chairman receives a base fee.
The following fees are paid to
Non-Executive Directors
in addition to their base fee:
●●● SID fee
●●● Committee Chairmanship fee
●●● Committee membership fee
Fees are reviewed on an
annual basis against a relevant
peer group and taking into
consideration market practice.
An allowance is payable to
directors for attendance at
meetings outside their country of
residence where such meetings
involve inter-continental travel.
In addition, reasonable travel
and business related expenses
are paid.
Non-Executive Directors are
not entitled to receive incentives
and pension.
Non-Executive Directors are
encouraged to hold shares in
the Group but are not subject
to a shareholding requirement.
94
Serco Group plc | Annual report and accounts 2013Directors’ Report Dates of Director’s Service Contracts/Letters of Appointment
Director
Ed Casey
Andrew Jenner
Alastair Lyons
Angie Risley
Ralph D. Crosby Jr
Malcolm Wyman
Mike Clasper
Tamara Ingram
Rachel Lomax
Date of appointment to the Board
24 October 2013
3 May 2002
16 March 2010
1 April 2011
30 June 2011
1 January 2013
3 March 2014
3 March 2014
3 March 2014
Notes:
All directors are put forward annually for re-election at the AGM.
Christopher Hyman was appointed to the Board on 1 April 1999 and ceased to be a director on 25 October 2013.
Annual Report on Remuneration
Statement of Implementation of Remuneration Policy for year ended 31 December 2013
The remuneration policy for the year ended 31 December 2013 was consistent with the policy on which shareholders will vote at the 2014 AGM apart
from the following that are being implemented for 2014:
●●● Malus and clawback provisions did not apply under the Deferred Bonus Plan and Performance Share Plan for awards prior to 2014
●●● A holding period did not apply to the Performance Share Plan after the vesting period for awards prior to 2014
●●● Committee membership fees were not paid to Non-Executive Directors prior to 2014.
Single Figure – Directors’ remuneration (audited information)
Executive Director’s single figure
The following table shows a single total figure of remuneration in respect of qualifying services for the 2013 financial year for each Executive Director,
together with comparative figures for 2012. Details of NEDs’ fees are set out in the next section.
Salary and fees
Taxable benefits1
Bonus2
LTI3
Pension4
Total
Ed Casey
Christopher Hyman
Andrew Jenner
2013
£
121,113
2,634
134,701
–
36,334
294,782
2012
£
N/A
N/A
N/A
N/A
N/A
N/A
2013
£
626,977
59,572
–
–
206,902
893,451
2012
£
744,500
77,254
812,250
701,435
245,685
2,581,124
2013
£
452,750
72,553
–
–
149,408
674,711
2012
£
436,750
77,755
412,984
359,725
144,128
1,431,342
Notes:
1. The value of the taxable benefits relate to the provision of independent financial advice, car allowance (fully inclusive of all scheme costs including insurance
and maintenance), health care and private medical assessments.
2. The bonuses shown include performance bonuses earned in the period under review, but not paid until the following financial year.
3. The value of shares vested in the year is based on an average market value over the last quarter of the financial year. The vesting date for the PSP is 31 March 2014
and the DBP is 4 April 2014, however these awards did not reach minimum vesting level so lapsed in full.
4. The pension amount includes payments made in lieu of pension, calculated as a percentage of base salary, from which the Executive Directors make their own
pension arrangements and which do not include the value of accrued pension under the DB scheme.
5. The 2012 LTI figures have been updated to reflect the actual share price on the date of vesting. The share price on 29 March 2013 when the DBP vested was 632p,
and on 8 April when the PSP vested it was 611.5p.
6. Ed Casey’s remuneration is paid in US dollars and relates to the period (25 October to 31 December 2013) in the role of Acting Group Chief Executive for the purpose
of the single figure £1 = USD 1.609.
7. Christopher Hyman’s remuneration is prorated to 25 October 2013.
95
Directors’ Report
Remuneration Report
The annual base salaries of the Executive Directors for the year ended 31 December 2013 were:
Director
Ed Casey
Christopher Hyman
Andrew Jenner
Base salary
Effective Date
Increase
$1,046,000
£779,000
£457,000
25 October 2013
1 April 2013
1 April 2013
N/A
3.86%
3.86%
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2013, the Group Chief Financial Officer’s bonus was on achieving a mix of financial and non-financial objectives which were weighted 80% and 20%
respectively. The financial measures were based on the Company’s Key Performance Indicators (KPIs) and the non-financial measures were individually
set and based on key strategic goals
Andrew Jenner, asked not to be considered for a bonus payment in 2013.
For 2013, Ed Casey’s bonus for the period (25 October to 31 December) he was Acting Group Chief Executive was based on achieving a mix
of financial and non-financial objectives. The financial measures were based on the Company’s Key Performance Indicators, in large part reflecting
the performance of our US business which he had led 10 months of the year, alongside non-financial objectives relating to his role as Acting Group
Chief Executive. Our US business has had a strong year and Ed has made an outstanding contribution as Acting Group Chief Executive, rapidly
getting to grips with our corporate renewal plan, demonstrating strong leadership in a time of great instability, and showing great personal flexibility.
On the basis of this performance, a bonus award of 111% has been determined for him for his period since appointment in October 2013.
Christopher Hyman asked not to be considered for a bonus payment in 2013.
Deferred Bonus Plan (DBP)
The LTI amount included in the 2013 single total figure of remuneration includes the DBP matching share award which was awarded in 2011.
For matching awards which completed their performance period on 31 December 2013, achievement against the measure is shown in the
table below:
Performance condition
Weighting
Threshold
– 25%
vesting
Maximum
– 100%
vesting
Actual
Percentage
of max
achieved
EPS compound growth. For
threshold performance each
invested share is matched
by half a share rising to
a match of two shares at
maximum performance.
Relative TSR. For median
performance each invested
share is matched by half
a share rising to a match
of two shares for upper
quartile performance.
Total
50%
9%
14%
7.69%
No shares vest
50%
Median
Upper quartile
Below median
No shares vest
0%
For awards made in 2012 onwards, EPS is the sole performance measure.
For performance between threshold and upper quartile or maximum, the number of matching shares will be determined on a straight line basis.
96
Serco Group plc | Annual report and accounts 2013Directors’ Report The awards made to the Executive Directors were as follows:
2011 DBP Matching share awards
Christopher Hyman
Andrew Jenner
Note:
1. Ed Casey did not participate in the DBP in 2011.
No of shares
awarded
No of shares
vesting
Vesting
date
173,898
88,033
0
0
4 April 2014
4 April 2014
Value of
vesting
£
0
0
Performance Share Plan (PSP)
The LTI amount included in the 2013 single total figure of remuneration includes the PSP award which was awarded in 2011. Face value awards on grant
were 200% of base salary for the Group Chief Executive and 175% for the Group Chief Financial Officer. For the PSP awards which completed their
performance period on 31 December 2013, achievement against the measure is shown in the table below:
Performance condition
Weighting
Threshold
– 25%
vesting
Maximum
– 100%
vesting
Actual
Percentage
of max
achieved
EPS growth. For threshold
performance 25% of the award
vests rising on a straight line
basis to 100% at maximum
performance.
Relative TSR. For median
performance each invested
share is matched by half
a share rising to a match
of two shares for upper
quartile performance.
Total
30%
9%
14%
7.69%
No shares vest
70%
Median
Upper quartile
Below median
No shares vest
0%
For awards made in 2012 onwards the EPS weighting was increased from 30% to 50% and the TSR weighting was reduced from 70% to 50%.
The awards made to the Executive Directors were as follows:
2011 PSP share awards
Ed Casey
Christopher Hyman
Andrew Jenner
No of shares
awarded
No of shares
vesting
Vesting
date
Value of
vesting
£
73,899
247,568
127,652
0
0
0
31 March 2014
31 March 2014
31 March 2014
0
0
0
Note:
1. Ed Casey’s PSP award was made prior to him being appointed to the Board.
97
Directors’ Report Remuneration Report
Single Figure – Non-Executive Directors’ remuneration (audited information)
Non-Executive Directors’ remuneration consists of cash fees paid monthly with increments for positions of additional responsibility. In addition,
an inter-continental travel allowance and reasonable travel and related business expenses are paid. No bonuses are paid to Non-Executive Directors.
Non-Executive Directors’ fees are not performance related.
Non-Executive Directors are encouraged to hold shares in the Group but are not subject to a shareholding requirement.
The fees and terms of engagement of Non-Executive Directors are reviewed on an annual basis, taking into consideration market practice
and are approved by the Board.
Board fee
(including
Chairmanship
fees)
£
2013
Board fee
(including
Chairmanship
fees)
£
2012
Allowances
£
2013
Allowances
£
2012
Total
£
2013
Total
£
2012
267,500
257,500
10,000
5,000
277,500
262,500
60,000
50,000
56,666
50,000
–
30,000
5,000
25,000
60,000
80,000
61,666
75,000
64,250
N/A
–
N/A
64,250
N/A
Alastair Lyons
Chairman; Chairman of Nomination
Committee and Member of
Remuneration Committee
Angie Risley
Chairman of Remuneration Committee;
Member of Audit and Nomination
Committees
Ralph D. Crosby Jr
Malcolm Wyman
Chairman of Audit Committee; SID;
Member of Nomination
and Remuneration Committees
Total
441,750
364,166
40,000
35,000
481,750
399,166
Notes:
1. Fees paid to the Chairman were increased from £260,000 to £270,000 with effect from 1 April 2013
2. £5,000 is payable for each occasion that requires inter-continental travel outside of the director’s country of residence.
Base fee
1 April 2013
£
Base fee
1 April 2012
£
Percentage
increase
270,000
10,000
50,000
12,500
10,000
5,000
260,000
10,000
50,000
12,500
10,000
5,000
3.8%
0%
0%
0%
0%
0%
Annual NED Fees
Role
Chairman
Senior Independent Director
Board fees
Audit Committee Chairmanship
Remuneration Committee Chairmanship
Travel to international meetings
98
Serco Group plc | Annual report and accounts 2013Directors’ Report Performance graph and table
This graph shows the value as at 31 December 2013, of a £100 investment in Serco on 31 December 2008 compared with £100 invested in the
FTSE250 index on the same date. It has been assumed that all dividends paid have been reinvested. The TSR level shown at 31 December each year
is the average of the closing daily TSR levels for the 30-day period up to and including that date.
310
260
210
160
110
60
32%
56%
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
●●Serco
●●FTSE250 Index
CEO’s pay in last five financial years
Year ended 31 December
CEO single figure remuneration (£)
Group CEO
Ed Casey
2009
–
2010
–
2011
–
2012
–
Christopher Hyman
3,625,830
2,646,894
2,826,038
2,582,185
Annual bonus outcome
(as % of maximum opportunity
LTI vesting outcome
(as % of maximum opportunity)
Ed Casey
Christopher Hyman
Ed Casey
–
90%
–
–
91%
–
Christopher Hyman
295.42%
168.77%
–
81%
–
80%
–
72%
–
63.60%
2013
294,782
893,451
74%
N/A
0%
0%
Percentage change in CEO’s remuneration
In the year ended 31 December 2013 Christopher Hyman received a 3.86% salary increase, no increase in taxable benefits and 100% less in bonus than
the equivalent amounts for the year ended 31 December 2012. The average percentage changes for employees in the leadership team were 2%,
0% and a 39.3% reduction respectively.
Relative importance of spend on pay
The chart below details the percentage change in dividends and overall expenditure on pay compared with the previous financial year.
Serco considers overall expenditure on staff pay in the context of the general finances of the company. This includes the determination of the annual
salary increase budget, the annual grant of shares and annual bonus for the business.
Changes in dividends and overall expenditure
on pay 2013 v 2012 (%)
4.5
4.5
4.4
4.4
4.3
4.3
4.2
32%
56%
Dividend
Overall Expenditure on Staff Pay
“Dividend”, and “Overall Expenditures on Staff Pay” have the same meaning as in the preparation of the accounts of the company.
99
Directors’ Report
Remuneration Report
Pensions (audited information)
As at 31 December 2013, there were no Executive Directors actively participating in or accruing additional entitlement in the Serco Pension
and Life Assurance Scheme which is a defined benefits scheme.
Payments for loss of office (audited information)
Christopher Hyman ceased to be a director of the Company on 25 October 2013 and left employment of the Company on 8 November 2013,
he was paid £47,430 during this period.
The principle adopted by the Committee when calculating his loss of office payment was to pay contractual entitlements and to allow a retention
of awards that would have vested during his twelve months notice period had he served such notice. All other unvested awards were forfeited.
Christopher Hyman’s compensation payment
12 months
Salary
Pension benefit*
Other benefits**
Total
£
779,000
257,070
73,754
1,109,824
* The pension benefit is a cash allowance equal to 33% of base salary in lieu of pension contributions.
** Private medical, permanent health insurance, life cover, financial advice, health checks and the provision of a car allowance.
Vesting of LTI awards
The awards granted to Christopher Hyman in 2011 under the PSP and the DBP would have vested on the usual vesting dates (31 March 2014 and
4 April 2014 respectively) to the extent that the relevant performance conditions have been met. These would have been reduced pro-rata to reflect
the proportion of the performance period which had elapsed at the date of cessation of employment. However, the performance conditions were
not met and so these awards lapsed.
Share awards
Performance achieved
2011 DBP award (173,898 shares)
Minimum vesting level not achieved
2011 PSP award (247,568 shares)
Minimum vesting level not achieved
Value of shares vesting
Shares
vested
No shares vest
No shares vest
£
0
0
0
Christopher Hyman has six months from the date of ceasing employment to exercise his previously vested outstanding options under the
Serco Group plc 2005 Executive Share Option Plan, 2006 Long Term Incentive Plan and Performance Share Plan.
Payments to Past Directors
No payments were made in the year to past directors other than the payments made to Christopher Hyman on him ceasing to be a director.
100
Serco Group plc | Annual report and accounts 2013Directors’ Report Awards made in 2013
Deferred Bonus Plan (DBP) (audited information)
In 2013 both the CEO and the CFO elected to defer 50% of their earned bonus into the DBP.
For matching share awards made in 2013, EPS growth was the sole performance measure. The range for the three-year performance period was
set at annual compound EPS growth of 5.5% at threshold to 10.5% at maximum. No matching shares will vest where performance is below threshold.
For threshold performance, each invested share will be matched by half a matching share. For maximum level performance each invested share
will be matched (on a gross investment basis) by two shares. For performance between threshold and maximum, the number of matching shares
will be determined on a straight line basis.
The definition of EPS is Adjusted EPS calculated in accordance with IAS 33 “Earnings per Share” and is before amortisation of acquired
intangibles arising on acquisitions, acquisition-related costs and exceptional items. EPS is also adjusted for any material acquisitions, disposals
and currency movements.
Directors
Scheme
Basis of Award
(% of salary)
Award
date
Market price
at award (p)1
Face value
£
Percentage
vesting at
threshold
performance
Number of
shares
Performance
period end date
Christopher
Hyman
Andrew
Jenner
Deferred
Bonus Plan
(conditional
share award)
Deferred
Bonus Plan
(conditional
share award)
108.3%
3 May13
625
812,044
25%
129,927
31 Dec 2015
93.86%
3 May 13
625
412,875
25%
66,060
31 Dec 2015
Notes:
1. The market price at award was the purchase price of the investment shares.
2. Ed Casey did not defer his 2012 earned bonus into the Deferred Bonus Plan.
Performance Share Plan (PSP) (audited information)
In 2013 the Executive Directors received awards equivalent to 200% of salary for the Group Chief Executive and 175% for the Group Chief Financial Officer.
The shares will normally only vest at the end of a three-year performance period, if the Executive Directors are still in employment with Serco and
the two performance measures have been met. The measures are EPS growth and relative TSR compared to the companies in the FTSE 51 to 130
(excluding investment trusts). The two measures are independent and each determines the vesting of half of the award
The structure for vesting is the same for both measures and no shares vest where performance is below Threshold.
For Threshold performance 25% of the award will vest rising on a straight line basis to 100% for maximum/upper quartile performance. The EPS growth
range was set at 5.5% – 10.5%.
Directors
Scheme
Basis of Award
(% of salary)
Award
date
Market price
at award (p)1
Face value
£
Percentage
vesting at
threshold
performance
Number of
shares
Performance
period end date
Ed
Casey2
Christopher
Hyman
Andrew
Jenner
Performance
Share Plan
(conditional
share award)
Performance
Share Plan
(nominal cost
options)
Performance
Share Plan
(nominal cost
options)
130%
15 Apr 13
618
468,203
25%
75,761
31 Dec 2015
200%
15 Apr 13
618
1,501,209
25%
242,914
31 Dec 2015
175%
15 Apr 13
618
770,621
25%
124,696
31 Dec 2015
Notes:
1. The market price at award was the preceding days MMQ.
2. Ed Casey’s conditional share award under the Performance Share Plan was made prior to him being appointed as Acting CEO and a director
and was equivalent to 130% of salary.
101
Directors’ Report Remuneration Report
Statement of voting at the general meeting
At the last annual general meeting, votes on the Remuneration Report were cast as follows:
2012 remuneration report
2011 remuneration report
2010 remuneration report
For % number
Against % number
Withheld % number*
95.82%
346,071,397
93.72%
351,474,463
92.98%
298,080,103
4.18%
15,084,901
6.28%
23,547,217
7.02%
22,494,102
N/A
5,923,160
N/A
8,299,355
N/A
54,392,029
* A “Vote Withheld” is not a vote in law and is not counted in the calculation of the proportion of votes “For” or “Against” a Resolution.
The disclosure in the 2014 Remuneration Report will include details of the binding shareholder vote at the 2014 AGM on directors’ remuneration policy.
External appointments
The Board believes that the Group can benefit from its Executive Directors holding appropriate non-executive directorships of companies
or independent bodies. Such appointments are subject to the approval of the Board. Fees are retained by the Executive Director concerned.
Andrew Jenner served as a non-executive director of Galliford Try plc during the year. Fees payable in the year were £40,400.
No other fee-paying external positions were held by the Executive Directors.
Directors’ shareholding and share interests (audited information)
Current shareholdings are summarised in the table below. Shares are valued for these purposes at the year-end price, which was £4.992 per share
at 31 December 2013.
Share
ownership
requirements
(% of salary)
Number of
shares required
to hold
Number of
shares owned
outright
(including
connected
persons)
Vested
unexercised
share options
Restricted
share awards
subject to
performance
conditions
Share
ownership
requirements
met
Weighted
average
exercise price
of vested
options
Weighted
average period
to vest
of restricted
share awards
Ed Casey
Christopher
Hyman
Andrew Jenner
Alastair Lyons
Angie Risley
Ralph D.
Crosby Jr
Malcolm
Wyman
100%
130,227
17,626
87,738
200,136
200%
150%
N/A
N/A
N/A
N/A
312,099
137,320
N/A
N/A
N/A
N/A
526,387
464,861
33,600
5,967
–
–
794,090
618,937
421,466
633,123
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
No
Yes
Yes
N/A
N/A
N/A
N/A
0
306
204
N/A
N/A
N/A
N/A
0
0.02
0.02
N/A
N/A
N/A
N/A
Notes:
1. Ordinary shares are beneficial holdings which include the Directors’ personal holdings and those of their spouses and minor children.
2. 122,990 of Christopher Hyman’s and 65,386 of Andrew Jenner’s shares are held in trust on their behalf under the terms of their participation in the Deferred Bonus Plan.
Provided such shares remain in trust for three years and subject to certain performance conditions, they are also granted an award over matching shares equivalent
to two times the gross bonus initially used for the share purchase.
3. Security has been granted to Christopher Hyman’s bank over 85,564 ordinary shares held in his name.
102
Serco Group plc | Annual report and accounts 2013Directors’ Report Gain on exercise of share awards
Ed Casey
Christopher Hyman
Andrew Jenner
Aggregate gain on exercise of shares awards
Number
of options
exercised
26,611
59,832
289,515
30,549
173,709
Exercise
price
Market value
on exercise
(p)
-
-
153
-
153
608
605
605
605
605
Gain on
exercise of
share option/
award
£
161,662
361,954
1,308,462
184,806
785,077
2,801,961
Note:
1. The awards that Ed Casey exercised during the year were granted prior to him being appointed to the Board.
Other Shareholding information (audited information)
Shareholder Dilution
Awards granted under the Serco Group plc share plans are met either by the issue of new shares or by shares held in trust when awards vest.
The Committee monitors the number of shares issued under its various share plans and their impact on dilution limits. The relevant dilution limits
established by the Association of British Insurers in respect of all share plans is 10% in any rolling ten-year period and in respect of discretionary share
plans is 5% in any rolling ten-year period. Based on the Company’s issued share capital at 31 December 2013, our dilution level was 6.83% against
all share plans and 4.54% against discretionary share plans.
The Group has an employee share ownership trust which is administered by an independent trustee and which holds ordinary shares in the Company
to meet various obligations under the share plans. In June 2013 a loan of £16 million was made to the Employee Trust in order to finance the purchase
of shares to satisfy the ongoing liabilities under the Company’s employee share plans.
The Trust held 10,174,594 and 11,883,973 ordinary shares at 1 January 2013 and 31 December 2013 respectively.
103
Directors’ Report Remuneration Report
The Remuneration Committee
The Committee determines the overall remuneration policy for senior management and the individual remuneration of the Executive Directors and the
members of the Executive Committee. This includes the base salary, bonus, long-term incentives, pensions and terms of employment (including those
terms on which service may be terminated). The Committee also determines the remuneration of the Chairman.
Terms of reference
The terms of reference of the Committee, a copy of which can be found on the Group’s website, are reviewed annually to ensure that they remain
appropriate. Details of the Directors’ attendance at meetings of the Committee can be found in the Corporate Governance Report on page 69.
Members of the Committee
All members of the Committee are independent. Non-Executive Directors of the Group are initially appointed for a three-year term, and that appointment
may be terminated on three months’ written notice.
Remuneration Committee members and attendees (the Committee met 11 times during 2013)
Remuneration Committee
members
Position
Comments
Angie Risley
Alastair Lyons
Chairman of Remuneration Committee
Member from 10 May 2011
David Richardson
Member from 2 June 2003
Retired from the Board at the conclusion
of the Company’s 2013 AGM on 15 May
2013
Malcolm Wyman
Tamara Ingram
Member from 1 January 2013
Member from 3 March 2014
Christopher Hyman
Group Chief Executive
Attended by invitation
Andrew Jenner
Geoff Lloyd
Group Chief Financial Officer
Attends by invitation
Group HR Director
Attends as an executive responsible for
advising on the remuneration policy
Attends as an executive responsible for
advising on the remuneration policy
Cathy Aldwinckle
Group Head of Reward
John Hickey
Company Secretary
Attends as the secretary to the Committee
104
Serco Group plc | Annual report and accounts 2013Directors’ Report
Meeting
February
March
May
August
November
Regular items
Ad hoc items
Consider salary review proposals for
the Executive Directors, members of the
Executive Committee and the Company
Secretary; review of achievement of
performance conditions for LTI vesting;
review final draft of the remuneration report
Confirmation of bonus payable; approve
the salary increases for the Executive
Directors, members of the Executive
Committee and the Company Secretary;
review bonus objectives; approve LTI
awards; finalisation of remuneration report
Review the share scheme performance
Review performance of the Executive
Directors against bonus objectives; review
the share scheme performance; review of
Remuneration Committee advisors
Review the Committee Terms of
Reference; review the share scheme
performance
Finalisation of termination package for
Christopher Hyman; Consideration of
remuneration package for Ed Casey
Advisors to the Remuneration Committee
The Committee has been advised during the year by PricewaterhouseCoopers LLP (“PwC”). PwC were selected as advisors to the Committee
through a competitive tendering process in 2012 and no conflicts of interest were identified.
PwC have provided advice throughout the year mainly around the following key executive reward areas:
●●● Benchmarking the Chairman and Non-Executive Director fees
●●● Benchmarking the Board and Executive Committee total remuneration
●●● Support in reviewing the DRR
●●● Advice in relation to design of remuneration arrangements and treatment of leavers and joiners
●●● Responding to general and technical reward queries
A representative from PwC attends each meeting of the Remuneration Committee. Consulting services have also been provided to the Group
by the advisors in relation to retirement benefits and pay data, accounting and taxation services.
Fees paid to PwC as advisors to the Committee during the year totalled £144,600, fees are charged on an hourly rate basis. PwC are members
of the Remuneration Consultants’ Group which oversees the voluntary code of conduct in relation to executive consulting in the UK.
The Committee reviews the objectivity and independence of the advice it receives from PwC each year. It is satisfied that PwC is providing robust
and professional advice. In the course of its deliberations, the Committee considers the views of the Group Chief Executive on the remuneration
and performance of the other members of the Executive Committee. The Committee have also received legal advice from Linklaters LLP and
Clifford Chance LLP during the year.
Approved by the Board of Directors and signed on its behalf by:
John Hickey
Secretary
3 March 2014
105
Directors’ Report
Directors’ Report
Annual Report and Accounts
The Directors have pleasure in presenting the Annual Report and Accounts of the Group for the year ended 31 December 2013. Comparative figures
used in this report are for the year ended 31 December 2012. The Corporate Governance Report set out on pages 60 to 74 forms part of the Statutory
Directors’ Report.
The Chairman’s Statement and the remainder of the Strategic Report on pages 2 to 59, provide a description of the business model and report
on the activities during the year, post balance sheet events, and likely future developments.
Share capital
The issued share capital of the Company, together with the details of shares issued during the year is shown in note 35 to the Consolidated
Financial Statements.
The powers of the Directors to issue or buy back shares are restricted to those approved at the Company’s annual general meeting.
The rules relating to the appointment and replacement of Directors are contained in the Company’s Articles of Association. Changes to the Articles
of Association must be approved by the shareholders in accordance with the legislation in force from time to time.
Dividends
An interim dividend of 3.10p (2012 : 2.65p) per ordinary share was paid on 18 October 2013. The Directors recommend a final dividend of 7.45p
(2012 : 7.45p) per ordinary share which, if approved by shareholders at the Annual General Meeting, will be paid on 14 May 2014 to those
shareholders on the register at the close of business on 14 March 2014.
Interests in voting rights
As at 3 March 2014* the Company had been notified under Rule 5 of the Disclosure Rules and Transparency Rules of the Financial Conduct Authority
of the following holdings of voting rights in its shares:
Invesco Limited
The Capital Group Companies, Inc.
UBS Investment Bank
Morstan Nominees Limited
AXA S.A.
Fidelity International Limited
Baillie Gifford & Co
FMR LLC
Newton Investment Management Limited
BlackRock Inc
HBOS plc
Number of shares (millions)
% held
(millions)
71.8
24.7
29.1
25.1
24.4
24.5
24.0
24.3
23.6
24.1
20.5
14.37
4.96
5.90
5.11
4.95
4.90
4.92
4.86
4.85
4.82
4.22
The Directors are unaware of any restrictions on transfer of securities in the Company or on voting rights. There are also no known agreements between
holders of the Company’s securities which may result in such restrictions.
Directors
The current members of the Board together with biographical details of each Director are set out on pages 62 to 64.
On 25 October 2013, the Company announced the appointment of Edward J Casey Jr as an Executive Director of the Company with effect from the
same date. On 3 March 2014, the Company announced the appointments of Mike Clasper, Tamara Ingram and Rachel Lomax as Non-Executive
Directors of the Company with effect from the same date. Mike will serve as a member of the Audit, Corporate Responsibility and Nomination
Committees. Tamara will join the Remuneration and Corporate Responsibility Committees. Rachel will Chair the Corporate Responsibility Committee
and serve as a member of the Audit Committee. Ed, Mike, Tamara and Rachel will all stand for election at the Company’s AGM on 8 May 2014.
As in previous years, and in accordance with the UK Corporate Governance Code, all other Directors will stand for re-election at the AGM.
Directors’ interests
With the exception of the Executive Directors’ service contracts and the Non-Executive Directors’ letters of appointment, there are no contracts
in which any Director has an interest.
Certain change in control conditions are included in the service contracts of Directors which provide compensation or reduction of notice periods
in the event of a change in control of the Company.
Details of the Directors’ interests in the ordinary shares and options over the ordinary shares of the Company are set out in the Remuneration Report
on page 102.
106
Serco Group plc | Annual report and accounts 2013Directors’ Report Annual general meeting
The Annual General Meeting of the Company will be held at the offices of Clifford Chance LLP, 10 Upper Bank Street, London E14 5JJ on 8 May 2014
at 11.00am.
The Notice of Annual General Meeting together with explanatory notes is sent to shareholders with this Annual Report.
Financial risk policies
A summary of the Group’s treasury policies and objectives relating to financial risk management, including exposure to associated risks, is shown
on pages 152 to 157.
Employment policies
The Board is committed to maintaining a working environment where staff are individually valued and recognised. Group companies and divisions
operate within a framework of human resources policies, practices and regulations appropriate to their own market sector and country of operation,
whilst subject to Group-wide policies and principles.
The Group is committed to ensuring equal opportunity, honouring the rights of the individual, and fostering partnership and trust in every working
relationship. Policies and procedures for recruitment, training and career development promote diversity, respect for human rights and equality
of opportunity regardless of gender, sexual orientation, age, marital status, disability, race, religion or other beliefs and ethnic or national origin.
The Group promotes diversity so that all employees are able to be successful regardless of their background. The Group gives full consideration to
applications for employment, career development and promotion received from the disabled and offers employment when suitable opportunities arise.
If employees become disabled during their service with the Group arrangements are made wherever practicable to continue their employment and
training. Further information on gender breakdown is provided in the Strategic Report at pages 54.
The Group recognises and applies the principles in the Universal Declaration on Human Rights. These are embedded in the Company’s policies
and standards and considered when reviewing business opportunities. Further information on Human Rights is provided in the Strategic Report
at page 54.
The Group remains proud of its record of managing employee relations and continues to believe that the structure of individual and collective
consultation and negotiation is best developed at a local level.
Over the years, the Group has demonstrated that working with trade unions and creating effective partnerships allows improvements to be delivered
in business performance as well as in terms and conditions of employment. Where employees choose not to belong to a trade union, employee
communication forums such as works councils exist to ensure involvement of staff within the business.
Participation by staff in the success of the Group is encouraged by the availability of sharesave schemes, a share option scheme, and long term
incentive arrangements for senior management, which effectively align their interests with those of shareholders by requiring that performance criteria
are achieved prior to exercise.
Corporate Responsibility
The Group maintains a focus on corporate responsibility through a model that is applied across the business focusing on our people, safety,
the environment and the communities we serve. This model forms an integral part of our Management System and is supported by defined policies
in all of the areas it covers. More information on Corporate Responsibility, including Greenhouse Gas Emission reporting, can be found in the
Strategic Report on pages 52 to 59.
Political Donations
During the year neither the Company nor the Group made political donations and they intend to continue with this policy. Within the US business
there exists a Political Action Committee (PAC), which is funded entirely by employees and their spouses. The Serco PAC and its contributions are
administered in strict accordance with regulatory requirements. Employee contributions are entirely voluntary and no pressure is placed on employees
to participate. Under US law, an employee-funded PAC must bear the name of the employing company.
Financial statements
At the date of this report, as far as each Director is aware, there is no relevant audit information of which the Group’s auditors are unaware.
Each Director has taken all the steps that he or she ought to have taken as a Director in order to make himself or herself aware of any relevant
audit information and to establish that the Group’s auditors are aware of that information.
Auditors
Deloitte LLP have expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed at the forthcoming
Annual General Meeting.
Approved by the Board of Directors and signed on its behalf by:
John Hickey
Company Secretary
3 March 2014
*As at 25 March 2014 the Company had not been notified of any changes or additions to these interests
107
Directors’ Report Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the
group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and Article 4
of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with Financial Reporting Standard 101
Reduced Disclosure Framework. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true
and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing the parent company financial statements, the Directors are required to:
●●● Select suitable accounting policies and then apply them consistently
●●● Make judgments and accounting estimates that are reasonable and prudent
●●● State whether Financial Reporting Standard 101 Reduced Disclosure Framework has been followed, subject to any material departures disclosed
and explained in the financial statements, and
●●● Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
●●● Properly select and apply accounting policies
●●● Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
●●● Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact
of particular transactions, other events and conditions on the entity’s financial position and financial performance, and
●●● Make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose
with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the
Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
1. The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole
2. The Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face, and
3. The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for
shareholders to assess the Company’s performance, business model and strategy.
By order of the Board
Ed Casey
Acting Group Chief Executive
3 March 2014
Andrew Jenner
Group Chief Financial Officer
3 March 2014
108
Serco Group plc | Annual report and accounts 2013Directors’ Report
IndependentAuditor’sReport
tothemembersofSercoGroupplc
Opinion on financial statements of Serco Group plc
In our opinion:
●●● thefinancialstatementsgiveatrueandfairviewofthestateoftheGroup’sandparentcompany’saffairsasat31December2013,andofthe
Group’sprofitfortheyearthenended;
●●● theconsolidatedfinancialstatementshavebeenproperlypreparedinaccordancewithInternationalFinancialReportingStandards(IFRSs)
asadoptedbytheEuropeanUnion;
●●● theparentcompanyfinancialstatementshavebeenproperlypreparedinaccordancewiththeFinancialReportingStandard101ReducedDisclosure
Framework;and
●●● thefinancialstatementshavebeenpreparedinaccordancewiththerequirementsoftheCompaniesAct2006and,asregardstheGroupfinancial
statements,Article4oftheIASRegulation.
Thefinancialstatementscomprisetheconsolidatedincomestatement,theconsolidatedstatementofcomprehensiveincome,theconsolidatedand
companybalancesheets,theconsolidatedcashflowstatement,theconsolidatedstatementsofchangesinequity,andtherelatednotes1to55.
ThefinancialreportingframeworkthathasbeenappliedinthepreparationoftheconsolidatedfinancialstatementsisapplicablelawandIFRSs
asadoptedbytheEuropeanUnion.Thefinancialreportingframeworkthathasbeenappliedinthepreparationoftheparentcompanyfinancial
statementsisapplicablelawandtheFinancialReportingStandard101ReducedDisclosureFramework.
Going concern
AsrequiredbytheListingRuleswehavereviewedtheDirectors’assessmentincludedintheFinanceReviewsectionoftheStrategicReportthatthe
Groupisagoingconcern.Weconfirmthat:
●●● wehaveconcludedthatthedirectors’useofthegoingconcernbasisofaccountinginthepreparationofthefinancialstatementsisappropriate;and
●●● wehavenotidentifiedanymaterialuncertaintiesthatmaycastsignificantdoubtontheGroup’sabilitytocontinueasagoingconcern.
However,becausenotallfutureeventsorconditionscanbepredicted,thisstatementisnotaguaranteeastotheGroup’sabilitytocontinueas
agoingconcern.
109
Financial statements IndependentAuditor’sReport
tothemembersofSercoGroupplc
Our assessment of risks of material misstatement
Theassessedrisksofmaterialmisstatementdescribedbelowarethosethathadthegreatesteffectonourauditstrategy,theallocationofresources
intheaudit,anddirectingtheeffortsoftheengagementteam:
Risk
How the scope of the audit responded to the risk
Revenue and profit recognition
Therearesignificantaccountingjudgementsinapplyingthe
Group’srevenuerecognitionpoliciestothecontractsentered
intobytheGroup.
Revenueandprofitrecognitiononcontractsrequiresjudgement
overcomplexareasincludingassessmentofstageofcompletion;
considerationofonerouscontractterms;recognitionofpre-contract
costs;andbillingandcashflowarrangements.TheGroup’s
policyonrevenuerecognitionissetoutinnote2totheGroup
financialstatements.
Duringtheyear75%oftheUKCentralGovernmentcontractswere
subjecttoanexternalreviewintooperationalandbillingarrangements.
Disclosure of items as exceptional
TheGrouphasrecordedexceptionalincomeandexpenditurein
respectofone-offitemsandtransactionsthatfalloutsideofthe
normalcourseoftrading.Inparticular,theGroupsettledamaterial
contractualdisputewiththeCabinetOfficeintheyearanddisposed
ofcertainnon-corebusinessesasdisclosedinnote11tothe
financialstatements.
Wecarriedouttestsrelatingtocontrolsoverrevenuerecognition,
includingthetimingof,andtherightto,recogniserevenue.Wealso
reviewedforecastcoststocompleteandprofitrecognitionpolicies
onthosecontractswheretherequirementistorecogniserevenue
onapercentageofcompletionbasis.
Wereviewedspecificcontractforecastsandhistoricaloperational
coststovalidatemanagement’sassessmentofwhethercontractsare
deemedtobeonerousandreviewedprovisionsforanticipatedlosses.
Wealsoconsideredtheresultsoftheexternalforensicinvestigations
inscopingthefocusofourtestingandwork.
Wereviewedthenatureofexceptionalitems,challenged
management’sjudgementsinthisareaandagreedthequantification
tosupportingdocumentation.
Inparticular,wediscussedwiththeDirectorsandtheAuditCommittee,
thecostsrelatedtotheCabinetOfficecontractualdispute,andverified
coststoappropriateauditevidence.
ExceptionalitemsarenotdefinedbyIFRSsasadoptedbythe
EuropeanUnion.ThereforejudgementisrequiredbytheDirectors
toidentifysuchitemsasexceptionalandtomaintaincomparability
oftheresultswithpreviousyears.
OntheClinicalHealthonerouscontractsandontheimpairmentof
assets,wereviewedandchallengedmanagement’sforecastsand
underlyingassumptionsindeterminingthelevelofexceptionalcosts
recorded.
Inrespectofthesalesofbusinessesintheyear,wealsotested
thecomponentpartsoftheprofitondisposalcalculationtosource
documentationincludingtheproceedsreceived,thenetassets
disposedofandthecostsassociatedwiththedisposal,including
goodwillallocationtothedisposedentities.
Goodwill and intangible assets
Theassessmentofthecarryingvalueofgoodwillandotherintangible
assetsisajudgementalprocesswhichincludesassumptionsaround
futurerevenuegrowthandcashperformance,togetherwiththe
applicablediscountrate.
Weevaluatedmanagement’sassumptionswithinthecashflow
forecastsusedinthevalueinusecalculationsforeachCash
GeneratingUnit(“CGU”)andotherintangibleassetsasdescribed
innote20tothefinancialstatements.TheseincludeCGUcashflow
projections,growthratesandpipelinelevelsateachCGU.
Thereareinherentuncertaintiesinforecastcashflowmodellingwhich
requiretheexerciseofmanagementjudgement.
GoodwillandintangibleassetsarematerialbalancesintheGroup
financialstatementsandtheGroupoperatesinvariousglobalmarkets
whicharesusceptibletoeconomicchange.Groupmanagement’skey
judgementsaredisclosedinnote20tothefinancialstatements.
WehavechallengedthediscountrateappliedtotheseparateCGUs
byutilisingvaluationexperts,theprevailingGroupcostofcapitalat
theyearendandourunderstandingofthefutureprospectsofthe
Group.Wehaveconsideredthelevelofriskadjustmentappliedto
eachoftheCGUs.
Wehaveassessedmanagement’ssensitivitiesappliedtothemodel.
WehaveconsideredwhethertheGroup’sdisclosureappropriately
reflectedtherisksinherentinthevaluationofgoodwillassessed.
Pension commitments
TheactuarialassumptionsusedinthemeasurementoftheGroup’s
pensioncommitmentsinvolvemanagementjudgementinrelation
tomortality,priceinflation,discountrates,andrateofpensionand
salaryincreases.
Weevaluatedtheappropriatenessoftheprincipalactuarial
assumptionsusedinthecalculationoftheGroup’spension
commitments,usingourownactuarialexperts,andbymaking
enquiriesoftheGroup’sexternalactuaryastothekeyassumptions
made,andcomparingthesetoourknowledgeofmarketpractice.
Judgementisalsoexercisedindeterminingwhetherapensionsurplus
shouldberecognised,andtheextentoftheGroup’spensionliability
inrespectoffranchiseandothercontractualagreements.
Aspartofourworkweevaluatedtherecoverabilityofpensionsurplus
amountsandofcontractspecificpensioncommitmentsrecorded
franchiseadjustments(notes21and34).
110
Serco Group plc | Annual report and accounts 2013Financial statements TheAuditCommittee’sconsiderationoftheserisksissetoutonpage77.
Ourauditproceduresrelatingtothesemattersweredesignedinthecontextofourauditofthefinancialstatementsasawhole,andnottoexpressan
opiniononindividualaccountsordisclosures.Ouropiniononthefinancialstatementsisnotmodifiedwithrespecttoanyoftherisksdescribedabove,
andwedonotexpressanopinionontheseindividualmatters.
Our application of materiality
Wedefinematerialityasthemagnitudeofmisstatementinthefinancialstatementsthatmakesitprobablethattheeconomicdecisionsofareasonably
knowledgeablepersonwouldbechangedorinfluenced.Weusematerialitybothinplanningthescopeofourauditworkandinevaluatingtheresults
ofourwork.
WedeterminedmaterialityfortheGrouptobe£12.5million,whichisbelow6.5%ofnormalisedpre-taxprofit.Pre-taxprofithasbeennormalisedby
addingbacknetexceptionalcostsof£90.5millionincurredintheyear.
WeagreedwiththeAuditCommitteethatwewouldreporttotheCommitteeallauditdifferencesinexcessof£200,000,aswellasdifferencesbelow
thatthresholdthat,inourview,warrantedreportingonqualitativegrounds.WealsoreporttotheAuditCommitteeondisclosuremattersthat
weidentifiedwhenassessingtheoverallpresentationofthefinancialstatements.
An overview of the scope of our audit
OurgroupauditwasscopedbyobtaininganunderstandingoftheGroupanditsenvironment,includinggroup-widecontrols,andassessingtherisks
ofmaterialmisstatementatthegrouplevel.Basedonthatassessment,wefocusedourgroupauditscopeprimarilyontheauditworkatfouroperating
divisions:UK&Europe,GlobalServices,AmericasandAMEAA.Eachofthesewassubjecttoafullaudit.Inthecaseofsignificantjointventures,the
Groupauditteamissueauditreferralinstructionstotheauditorsoftheseentities.Inaddition,certaincentralreportingentitiesandGroupfunctions
includingthosecoveringtreasury,taxationandpensionsandtheparentcompanyweresubjecttoanaudit.Ourauditworkateachdivisionwas
executedatlevelsofmaterialityapplicabletoeachindividualentitywhichwerelowerthanGroupmateriality.
Attheparententitylevelwealsotestedtheconsolidationprocessandcarriedoutanalyticalprocedurestoconfirmourconclusionthattherewere
nosignificantrisksofmaterialmisstatementoftheaggregatedfinancialinformationoftheremainingcomponentsnotsubjecttoauditorauditof
specifiedaccountbalances.
TheGroupauditteamfollowsaprogrammeofplannedvisitstotheoperatinglocationsoftheGroupthatisdesignedtoensuretheSeniorStatutory
Auditororanotherseniormemberofthegroupauditteamvisitstheprincipallocationsatleastonceayearandremaininglocationsaspartofour
rotationstrategy.For2013yearendauditpurposestheSeniorStatutoryAuditororanotherseniormemberofthegroupauditteamvisitedWashington
DC,Dubai,MumbaiandDelhi.TheGroupauditteamalsoholdsdetailedmeetingswithauditteamsintheotherlocations.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
●●● thepartoftheDirectors’RemunerationReporttobeauditedhasbeenproperlypreparedinaccordancewiththeCompaniesAct2006;and
●●● theinformationgivenintheStrategicReportandtheDirectors’Reportforthefinancialyearforwhichthefinancialstatementsareprepared
isconsistentwiththefinancialstatements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
UndertheCompaniesAct2006wearerequiredtoreporttoyouif,inouropinion:
●●● wehavenotreceivedalltheinformationandexplanationswerequireforouraudit;or
●●● adequateaccountingrecordshavenotbeenkeptbytheparentcompany,orreturnsadequateforouraudithavenotbeenreceivedfrombranches
notvisitedbyus;or
●●● theparentcompanyfinancialstatementsarenotinagreementwiththeaccountingrecordsandreturns.
Wehavenothingtoreportinrespectofthesematters.
Directors’ remuneration
UndertheCompaniesAct2006wearealsorequiredtoreportifinouropinioncertaindisclosuresofdirectors’remunerationhavenotbeenmadeorthe
partoftheDirectors’RemunerationReporttobeauditedisnotinagreementwiththeaccountingrecordsandreturns.Wehavenothingtoreportarising
fromthesematters.
Corporate Governance Statement
UndertheListingRuleswearealsorequiredtoreviewthepartoftheCorporateGovernanceStatementrelatingtotheCompany’scompliancewithnine
provisionsoftheUKCorporateGovernanceCode.Wehavenothingtoreportarisingfromourreview.
111
Financial statements IndependentAuditor’sReport
TothemembersofSercoGroupplc
Our duty to read other information in the Annual Report
UnderInternationalStandardsonAuditing(UKandIreland),wearerequiredtoreporttoyouif,inouropinion,informationintheannualreportis:
●●● materiallyinconsistentwiththeinformationintheauditedfinancialstatements;or
●●● apparentlymateriallyincorrectbasedon,ormateriallyinconsistentwith,ourknowledgeoftheGroupacquiredinthecourseofperforming
ouraudit;or
●●● otherwisemisleading.
Inparticular,wearerequiredtoconsiderwhetherwehaveidentifiedanyinconsistenciesbetweenourknowledgeacquiredduringtheauditandthe
directors’statementthattheyconsidertheannualreportisfair,balancedandunderstandableandwhethertheannualreportappropriatelydiscloses
thosemattersthatwecommunicatedtotheAuditCommitteewhichweconsidershouldhavebeendisclosed.Weconfirmthatwehavenotidentified
anysuchinconsistenciesormisleadingstatements.
Respective responsibilities of directors and auditor
AsexplainedmorefullyintheDirectors’ResponsibilitiesStatement,thedirectorsareresponsibleforthepreparationofthefinancialstatementsandfor
beingsatisfiedthattheygiveatrueandfairview.Ourresponsibilityistoauditandexpressanopiniononthefinancialstatementsinaccordancewith
applicablelawandInternationalStandardsonAuditing(UKandIreland).ThosestandardsrequireustocomplywiththeAuditingPracticesBoard’s
EthicalStandardsforAuditors.WealsocomplywithInternationalStandardonQualityControl1(UKandIreland).Ourauditmethodologyandtoolsaim
toensurethatourqualitycontrolproceduresareeffective,understoodandapplied.Ourqualitycontrolsandsystemsincludeourdedicatedprofessional
standardsreviewteam,strategicallyfocusedsecondpartnerreviewsandindependentpartnerreviews.
ThisreportismadesolelytotheCompany’smembers,asabody,inaccordancewithChapter3ofPart16oftheCompaniesAct2006.Ourauditwork
hasbeenundertakensothatwemightstatetotheCompany’smembersthosematterswearerequiredtostatetotheminanauditor’sreportandforno
otherpurpose.Tothefullestextentpermittedbylaw,wedonotacceptorassumeresponsibilitytoanyoneotherthantheCompanyandtheCompany’s
membersasabody,forourauditwork,forthisreport,orfortheopinionswehaveformed.
Scope of the audit of the financial statements
Anauditinvolvesobtainingevidenceabouttheamountsanddisclosuresinthefinancialstatementssufficienttogivereasonableassurancethatthe
financialstatementsarefreefrommaterialmisstatement,whethercausedbyfraudorerror.Thisincludesanassessmentof:whethertheaccounting
policiesareappropriatetotheGroup’sandtheparentcompany’scircumstancesandhavebeenconsistentlyappliedandadequatelydisclosed;
thereasonablenessofsignificantaccountingestimatesmadebythedirectors;andtheoverallpresentationofthefinancialstatements.Inaddition,
wereadallthefinancialandnon-financialinformationintheannualreporttoidentifymaterialinconsistencieswiththeauditedfinancialstatementsand
toidentifyanyinformationthatisapparentlymateriallyincorrectbasedon,ormateriallyinconsistentwith,theknowledgeacquiredbyusinthecourse
ofperformingtheaudit.Ifwebecomeawareofanyapparentmaterialmisstatementsorinconsistenciesweconsidertheimplicationsforourreport.
RichardKnights(SeniorStatutoryAuditor)
forandonbehalfofDeloitteLLP
CharteredAccountantsandStatutoryAuditor
London
UnitedKingdom
3March2014
112
Serco Group plc | Annual report and accounts 2013Financial statements 2013
Exceptional
items
£m
2012(restated)*
Before
exceptional
items
£m
Exceptional
items
£m
Total
£m
5,143.9
4,913.0
ConsolidatedIncomeStatement
Fortheyearended31December
Before
exceptional
items
£m
5,143.9
(855.8)
4,288.1
(3,788.9)
499.2
(287.1)
(21.4)
(3.5)
47.1
–
–
234.3
5.2
–
(42.4)
197.1
(40.0)
157.1
157.1
–
Continuing operations
Note
Adjustedrevenue
Less:Shareofrevenueofjoint
ventures
Revenue
Costofsales
Gross profit
Administrativeexpenses
Otherexpenses–amortisation
ofintangiblesarisingonacquisition
Otherexpenses–transaction-
relatedcosts
Shareofprofitsinjointventures,net
ofinterestandtax
Exceptionalnetprofitondisposal
ofsubsidiariesandoperations
Otherexceptionaloperatingitems
Operating profit
Investmentrevenue
Exceptionalothergain
Financecosts
Profit before tax
Tax
Profit for the year
Attributableto:
EquityownersoftheCompany
Non-controllinginterest
Earnings per share (EPS)
BasicEPS
DilutedEPS
10
7
11
11
14
11
15
16
19
19
–
–
–
–
–
–
–
–
–
19.2
(109.7)
(90.5)
–
–
–
(90.5)
28.8
(61.7)
(61.7)
–
(852.9)
4,060.1
(3,576.5)
483.6
(246.7)
(24.1)
(3.7)
62.5
–
–
271.6
6.4
–
(48.6)
229.4
(46.6)
182.8
182.2
0.6
(855.8)
4,288.1
(3,788.9)
499.2
(287.1)
(21.4)
(3.5)
47.1
19.2
(109.7)
143.8
5.2
–
(42.4)
106.6
(11.2)
95.4
95.4
–
19.51p
19.06p
Total
£m
4,913.0
(852.9)
4,060.1
(3,576.5)
483.6
(246.7)
(24.1)
(3.7)
62.5
5.6
(5.0)
272.2
6.4
51.1
(48.6)
281.1
(40.1)
241.0
240.4
0.6
–
–
–
–
–
–
–
–
–
5.6
(5.0)
0.6
–
51.1
–
51.7
6.5
58.2
58.2
–
32.13p
31.38p
(12.62)p
(12.32)p
37.09p
36.23p
11.85p
11.57p
48.94p
47.80p
*Certainamountsshownheredonotcorrespondtothe2012financialstatementsandreflectadjustmentsmadeinrespectoftheretrospective
applicationofneworrevisedstandardsandreallocationofcosts.Seenote4.
113
Financial statements ConsolidatedStatementofComprehensiveIncome
Fortheyearended31December
Profit for the year
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Netactuarialgain/(loss)ondefinedbenefitpensionschemes1
Actuarial(loss)/gainonreimbursablerights1
Taxrelatingtoitemsnotreclassified1
Shareofothercomprehensiveincome/(expense)injointventures
Items that may be reclassified subsequently to profit or loss:
Netexchangelossontranslationofforeignoperations2
Fairvaluelossoncashflowhedgesduringtheperiod2
Taxrelatingtoitemsthatmaybereclassified2
Shareofothercomprehensiveexpenseinjointventures
Total comprehensive income for the year
Attributableto:
EquityownersoftheCompany
Non-controllinginterest
Notes:
1.Recordedinretirementbenefitobligationsreserveintheconsolidatedstatementofchangesinequity.
2.Recordedinhedgingandtranslationreserveintheconsolidatedstatementofchangesinequity.
Note
34
34
16
16
2013
£m
95.4
30.3
(37.1)
3.0
3.9
(53.1)
(4.8)
1.2
(1.8)
37.0
37.0
–
2012
(restated)
£m
241.0
(117.0)
34.3
23.0
(0.9)
(18.6)
(4.1)
4.1
(0.4)
161.4
160.8
0.6
114
Serco Group plc | Annual report and accounts 2013Financial statements ConsolidatedStatementofChangesinEquity
Fortheyearended31December
Share
premium
account
£m
Capital
redemption
reserve
£m
Retained
earnings
£m
Retirement
benefit
obligations
reserve
£m
Share-
based
payment
reserve
£m
Own shares
reserve
£m
Hedging and
translation
reserve
£m
Total equity
£m
Non-
controlling
interest
£m
Share capital
£m
At1January2012
9.9
322.7
0.1
706.3
(92.0)
66.1
(48.2)
38.9
1,003.8
–
–
–
–
–
–
1.1
1.3
–
–
Changesinaccounting
policies(note4)
At1January2012
(restated)
Totalcomprehensive
incomefortheyear
Sharestransferred
tooptionholderson
exerciseofshareoptions
Dividendspaid
Expenseinrelationto
share-basedpayments
Taxchargeinrelationto
share-basedpayments
Purchaseofownshares
forEmployeeShare
OwnershipTrust(ESOT)
Changeinnon-controlling
interest
–
–
–
(2.8)
13.1
–
–
(10.3)
–
9.9
322.7
0.1
703.5
(78.9)
66.1
(48.2)
28.6
1,003.8
–
–
0.1
3.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
239.1
(59.7)
–
–
(18.6)
160.8
0.6
5.7
–
(41.9)
(0.4)
–
(41.9)
–
–
–
–
–
–
–
–
–
–
(3.6)
5.4
–
12.1
3.1
–
–
–
–
–
(16.0)
–
–
–
–
–
–
–
12.1
3.1
(16.0)
–
At 1 January 2013
10.0
326.5
0.1
900.7
(138.6)
77.7
(58.8)
10.0
1,127.6
Totalcomprehensive
incomefortheyear
Sharestransferred
tooptionholderson
exerciseofshareoptions
Dividendspaid
Expenseinrelationto
share-basedpayments
Taxcreditinrelationto
share-basedpayments
Purchaseofownshares
forESOT
Changeinnon-controlling
interest
–
–
–
–
–
–
–
–
1.3
–
–
–
–
–
–
–
–
–
–
–
–
97.5
(3.8)
–
–
(56.7)
37.0
–
(51.5)
–
–
–
–
–
–
–
–
–
–
(4.5)
4.3
–
2.9
(5.9)
–
–
–
–
–
(16.0)
–
–
–
–
–
–
–
1.1
(51.5)
(0.6)
2.9
(5.9)
(16.0)
–
–
–
–
–
At 31 December 2013
10.0
327.8
0.1
946.7
(142.4)
70.2
(70.5)
(46.7)
1,095.2
0.7
115
Financial statements ConsolidatedBalanceSheet
At
31 December
2013
Note
£m
At
31December
2012
(restated)
£m
At
1January
2012
(restated)
£m
1,253.9
180.4
174.4
36.1
78.9
122.3
25.0
1.1
1,872.1
47.9
701.0
9.2
194.6
6.2
958.9
2,831.0
(679.7)
(6.4)
(9.8)
(10.4)
(204.1)
(12.3)
(922.7)
(61.0)
(35.1)
(630.8)
(26.3)
(75.8)
(53.6)
(21.9)
(904.5)
1,270.8
185.7
176.8
8.1
78.3
64.2
57.9
–
1,841.8
49.4
764.4
19.5
125.1
8.7
967.1
2,808.9
(644.1)
(10.4)
(14.9)
(26.2)
(52.2)
(20.2)
(768.0)
(34.1)
(53.1)
(756.1)
(21.1)
(11.3)
(34.9)
(34.4)
(945.0)
1,312.1
215.7
176.9
11.9
49.2
69.7
40.1
0.1
1,875.7
53.1
778.1
24.6
142.8
2.7
1,001.3
2,877.0
(757.3)
(9.6)
(10.7)
(11.5)
(64.0)
(13.8)
(866.9)
(42.3)
(39.5)
(661.8)
(24.5)
(38.0)
(44.7)
(30.4)
(881.2)
(1,713.0)
(1,748.1)
1,095.9
1,128.9
(1,827.2)
1,003.8
10.0
327.8
0.1
946.7
(142.4)
70.2
(70.5)
(46.7)
1,095.2
0.7
1,095.9
10.0
326.5
0.1
900.7
(138.6)
77.7
(58.8)
10.0
1,127.6
1.3
1,128.9
9.9
322.7
0.1
703.5
(78.9)
66.1
(48.2)
28.6
1,003.8
–
1,003.8
Non-current assets
Goodwill
Otherintangibleassets
Property,plantandequipment
Interestsinjointventures
Tradeandotherreceivables
Retirementbenefitassets
Deferredtaxassets
Derivativefinancialinstruments
Current assets
Inventories
Tradeandotherreceivables
Currenttaxassets
Cashandcashequivalents
Derivativefinancialinstruments
Total assets
Current liabilities
Tradeandotherpayables
Currenttaxliabilities
Obligationsunderfinanceleases
Provisions
Loans
Derivativefinancialinstruments
Non-current liabilities
Tradeandotherpayables
Obligationsunderfinanceleases
Loans
Derivativefinancialinstruments
Retirementbenefitobligations
Provisions
Deferredtaxliabilities
Total liabilities
Net assets
Equity
Sharecapital
Sharepremiumaccount
Capitalredemptionreserve
Retainedearnings
Retirementbenefitobligationsreserve
Share-basedpaymentreserve
Ownsharesreserve
Hedgingandtranslationreserve
Equity attributable to owners of the Company
Non-controlling interest
Total equity
20
21
22
7
24
34
17
33
23
24
26
33
27
28
30
29
33
27
28
29
33
34
30
17
35
36
37
37
37
37
ThefinancialstatementswereapprovedbytheBoardofDirectorson3March2014andsignedonitsbehalfby:
EdCasey
ActingGroupChiefExecutive
AndrewJenner
GroupChiefFinancialOfficer
116
Serco Group plc | Annual report and accounts 2013Financial statements ConsolidatedCashFlowStatement
Fortheyearended31December
Net cash inflow from operating activities before cash spend on special pension contribution
and other exceptional items
Specialcontributiontodefinedbenefitpensionscheme
Otherexceptionalitems
Net cash inflow from operating activities
Investing activities
Interestreceived
Increaseinsecuritydeposits
Dividendsreceivedfromjointventures
Proceedsfromdisposalofproperty,plantandequipment
Proceedsfromdisposalofintangibleassets
Proceedsondisposalofsubsidiariesandoperations
Acquisitionofsubsidiaries,netofcashacquired(excludingtransaction-relatedcosts)
Purchaseofotherintangibleassets
Purchaseofproperty,plantandequipment
Net cash inflow/(outflow) from investing activities
Financing activities
Interestpaid
Dividendspaid
Non-controllinginterestdividendspaid
Repaymentofloans
Repaymentofnonrecourseloans
Newloanadvances
Capitalelementoffinanceleaserepayments
PurchaseofownsharesforEmployeeShareOwnershipTrust(ESOT)
Proceedsfromissueofsharecapitalandexerciseofshareoptions
Net cash outflow from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Netexchangeloss
Cash and cash equivalents at end of year
2013
£m
111.3
(19.7)
(83.7)
7.9
2.6
(0.2)
51.5
4.6
0.4
40.6
(18.6)
(27.8)
(38.9)
14.2
(40.8)
(51.5)
(0.6)
(77.5)
(10.2)
176.5
(4.9)
(16.0)
1.1
(23.9)
(1.8)
142.8
(15.9)
125.1
2012
(restated)
£m
225.9
–
(5.0)
220.9
2.5
–
80.6
20.9
0.1
131.0
(141.8)
(49.9)
(47.4)
(4.0)
(47.1)
(41.9)
(0.4)
(365.3)
(8.7)
216.3
(2.4)
(16.0)
5.7
(259.8)
(42.9)
194.6
(8.9)
142.8
Note
40
7
9
8
18
26
117
Financial statements 1. General information
Serco Group plc (the Company) is a company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered
office is Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY.
These consolidated financial statements (the financial statements) are presented in pounds Sterling because this is the currency of the primary
economic environment in which Serco Group operates. Foreign operations are included in accordance with the policies set out in note 2.
2. Significant accounting policies
Basis of accounting
These financial statements on pages 113 to 169 have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted
for use in the European Union and therefore comply with Article 4 of the EU IAS regulation.
The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. Historical cost is generally
based on the fair value of the consideration given in exchange for goods and services. The following principal accounting policies adopted have been
applied consistently in the current and preceding financial year except as stated below.
As discussed in more detail in the Finance Review section of the Strategic Report, these financial statements have been prepared on the going
concern basis.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (together, the
Group) up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of
acquisition or up to the effective date of disposal as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries
to bring accounting policies into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated
on consolidation.
Non-controlling interests represent the portion of profit or loss and net assets in subsidiaries that is not held by the Group and is presented within equity
in the consolidated balance sheet, separate from equity of shareholders of Serco Group plc.
Adoption of new and revised standards
The following accounting amendments, standards and interpretations became effective in the current reporting period:
●●● Amendments to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income
●●● IAS 19 Employee Benefits revised 2011
●●● IFRS 13 Fair Value Measurement
In addition, the Group has early adopted the following standards, which are endorsed by the EU but not effective until 1 January 2014:
●●● IFRS 10 Consolidated Financial Statements
●●● IAS 27 Separate Financial Statements
●●● IFRS 11 Joint Arrangements
●●● IAS 28 Investments in Associates and Joint Ventures
●●● IFRS 12 Disclosure of Interests in Other Entities
●●● IAS 36 Impairment of Assets
The nature and the impact of each of the new amendments, standards or interpretations which have a significant impact on the financial statements
are described below:
●●● IFRS 10 Consolidated Financial Statements (IFRS 10) replaces the parts of the previously existing IAS 27 that dealt with consolidated financial
statements. The new standard changes the definition of control such that an investor controls an investee when it is exposed, or has rights, to
variable returns from its involvement with the investee and has the ability to control those returns through its power over the investee. The adoption of
IFRS 10 has had no impact on the consolidation of investments held by the Group.
●●● IFRS 11 Joint Arrangements (IFRS 11) removed the option for the proportional consolidation of joint ventures and instead requires equity accounting.
A restatement of the 2012 results for these changes reduced statutory reported revenue by £852.9m and profit before tax by £15.1m.
●●● IFRS 12 Disclosures of Interests in Other Entities (IFRS 12) resulted in additional disclosures with respect to individual joint venture arrangements.
●●● IFRS 13 Fair Value Measurement (IFRS 13) establishes a single source of guidance under IFRS for all fair value measurements. IFRS 13 does not
change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under IFRS. IFRS 13 defines fair value
as an exit price. As a result of the guidance in IFRS 13, the Group re-assessed its policies for measuring fair values, in particular, its valuation inputs
such as non-performance risk for fair value measurement of liabilities. IFRS 13 also requires additional disclosures. Application of IFRS 13 has not
materially impacted the fair value measurements of the Group.
118
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 2. Significant accounting policies (continued)
●●● IAS 1 (amended) Presentation of Financial Statements (IAS 1) increases the required level of disclosure within the statement of comprehensive
income and clarified the requirements for comparative information. One impact of these amendments has been to analyse items within the statement
of comprehensive income between items that may be reclassified subsequently to profit or loss and items that will not. The financial statements have
also been amended to analyse income tax on the same basis. The amendments have been applied retrospectively, and hence the presentation
of items of comprehensive income has been restated to reflect the change. The amendments also clarify that the opening statement of financial
position (as at 1 January 2012 in the case of the Group) presented as a result of retrospective restatement or reclassification of items in the
financial statements does not have to be accompanied by comparative information in the related notes. Other than the above mentioned
presentation changes, the application of the amendments to IAS 1 do not result in any impact on profit or loss, comprehensive income and total
comprehensive income.
●●● IAS 19 (revised) Employee Benefits (IAS 19) requires pension interest return to be calculated using the value of scheme assets multiplied by the
discount rate rather than the expected rate of asset return. The Group has applied IAS 19 (revised) retrospectively and in accordance with the
transitional provisions as set out in that standard. The impact of this change is to reduce pre tax profits by £5.8m and to reduce post tax profits
by £4.9m. IAS 19 (revised) also introduces more extensive disclosures in the presentation of the defined benefit cost.
●●● IAS 36 (revised) Impairment of Assets (IAS 36). The amendments to IAS 36 enhance the disclosure requirements arising when recoverable amounts
have been determined on the basis of fair value less costs of disposal. They also limit the requirement to disclose the recoverable amount of an asset
or CGU to periods in which an impairment loss has been recognised or reverses. We have chosen to adopt the amendments early, as allowed by the
standard, with effect from 1 January 2013.
New standards and interpretations not applied
At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial
statements were in issue but not yet effective or have not yet been adopted by the EU:
●●● IFRS 9 Financial Instruments (IFRS 9)
●●● IAS 39 (revised) Financial Instruments: Recognition and Measurement (IAS 39)
The Directors do not anticipate that the adoption of these standards will have a material impact on the Group’s financial statements in the period of
initial application except for IFRS 9, which will impact both the measurement and disclosures of financial instruments. However, it is not practicable
to provide a reasonable estimate of the effect of this standard until a detailed review has been completed.
Fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating fair value of
an asset or liability, the Group takes into account those characteristics of the asset or liability market participants would consider when pricing the
asset or liability. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis,
except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17 Leases,
and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 Inventories or value in use
in IAS 36 Impairment of Assets.
Revenue recognition
Revenue is measured as the fair value of the consideration received or receivable and represents amounts due for goods and services provided
in the normal course of business, net of discounts, VAT and other sales related taxes.
Revenue is deferred when the Group has received consideration under the terms of a contract in advance of performing the related service or
delivering the associated goods. Deferred revenue is recognised as revenue in the income statement when the Group has fulfilled the relevant
contractual commitment.
Revenue recognition: repeat service-based contracts
Revenue on repeat service-based contracts is recognised as services are provided. Where initial contract costs (phase-in costs) are paid for by the
customer, revenue is recognised when the related costs are incurred.
Revenue recognition: long-term project-based contracts
The Group has a number of long-term contracts for the provision of complex, project-based services. Where the outcome of such long-term project-
based contracts can be measured reliably, revenue and costs are recognised by reference to the stage of completion of the contract activity at the
balance sheet date in accordance with IAS 18 Revenue and IAS 11 Construction Contracts. This is measured by the proportion of contract costs incurred
for work performed to date compared to the estimated total contract costs.
Variations in contract work, claims and incentive payments are included to the extent that they have been agreed with the customer, or are virtually
certain of being received.
Where the outcome of a long-term project-based contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs
that are probable to be recovered. Contract costs are recognised as expenses in the period in which they are incurred.
When it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
119
Financial statements 2. Significant accounting policies (continued)
Revenue recognition: other
Sales of goods are recognised when goods are delivered and title has passed.2. Significant accounting policies (continued)
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that
exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.
Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established.
Bid costs and phase in costs
All bid costs are expensed through the income statement up to the point where contract award (or full recovery of costs) is virtually certain, being the
point at which the Group is awarded preferred bidder status. Bid costs incurred after this point are then capitalised within trade and other receivables.
On contract award these bid costs are amortised through the income statement over the contract period by reference to the stage of completion of the
contract activity at the balance sheet date. Bid costs are only capitalised to the extent that it is expected that the related contract will generate sufficient
future economic benefits to at least offset the amortisation charge.
Phase in costs that are incremental and directly related to the initial set up of contracts are capitalised within trade and other receivables and are
recognised on a straight-line basis over the life of the contract, except where they are specifically reimbursed as part of the terms of the contract
when they are recognised as revenue.
Foreign currencies
Transactions in currencies other than Sterling are recorded at the rates of exchange on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Gains and
losses arising on retranslation are included in the net profit or loss for the period, except for exchange differences arising on non-monetary assets and
liabilities where the changes in fair value are recognised directly in equity through the consolidated statement of comprehensive income (SOCI).
On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the balance sheet date.
Income and expense items are translated at the average exchange rates for the period. Exchange differences arising, if any, are recognised directly
within equity in the Group’s hedging and translation reserve. Such translation differences are recognised as income or expenses in the period in which
the operation is disposed of. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at
the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by the Group
in exchange for control of the acquiree. Acquisition related costs are recognised in profit or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured
at its acquisition date fair value. Subsequent changes in fair values are adjusted against the cost of acquisition where they qualify as measurement
period adjustments (which is subject to a maximum of one year). All other subsequent changes in the fair value of contingent consideration classified
as an asset or liability are accounted for in accordance with the relevant accounting standards. Changes in the fair value of contingent consideration
classified as equity are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (2008) Business Combinations
are recognised at their fair value at the acquisition date, except where a different treatment is mandated by another standard.
Investments in joint ventures
A joint venture is an arrangement whereby the owning parties have joint control and rights over the net assets of the arrangement. Following adoption
of IFRS 11, the Group’s investments in joint ventures are no longer reported in the financial statements using the proportional consolidation method, but
are instead incorporated using the equity method of accounting.
Under the equity method, investments in joint ventures are carried in the consolidated balance sheet at cost less any impairment. For investments
held at the date of implementation, cost is deemed to be the aggregate of the carrying amounts of the assets and liabilities previously proportionately
consolidated. Any excess of the cost of acquisition over the Group’s share of net fair value of the identifiable assets, liabilities and contingent liabilities of
the joint venture recognised at the date of acquisition is recognised as goodwill. Goodwill is included within the carrying value amount of the investment
and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and
contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss. Where a Group entity transacts with
a joint venture, profits and losses are eliminated to the extent of the Group’s interest in the arrangement.
Goodwill
Goodwill arising on acquisition is recognised as an asset at the date that control is acquired. Goodwill is measured as the excess of the sum of the
consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquired entity,
over the net of the acquisition date amounts of the identifiable assets and liabilities acquired.
If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred,
the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquired entity, the excess is recognised
immediately in the income statement.
120
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 2. Significant accounting policies (continued)
Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in profit or loss and is
not subsequently reversed. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) expected
to benefit from the synergies of the combination. CGUs to which goodwill has been allocated are tested for impairment annually, or more frequently
when there is an indication that the unit may be impaired. If the recoverable amount of the CGU is less than the carrying amount of the unit, the
impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata
on the basis of the carrying amount of each asset in the unit. On disposal of a subsidiary, associate or jointly-controlled entity, the attributable amount
of goodwill is included in the determination of the profit or loss on disposal.
Other intangible assets
Assets are grouped into classes of similar nature and use and separately disclosed except where this is not material.
Expenditure on research is recognised as an expense in the period in which it is incurred. Development expenditure is capitalised as an intangible asset
only if all of the following conditions are met:
●●● an asset is created that can be separately identified, and which the Group intends to use or sell;
●●● the finalisation of the asset is technically feasible and the Group has adequate resources to complete its development for use or sale;
●●● it is probable that the asset created will generate future economic benefits; and
●●● the development cost of the asset can be measured reliably.
Customer relationships represent the value of contracts acquired on the acquisition of subsidiaries and are amortised over the average length of the
related contracts.
Purchased software and development expenditure is amortised over the period in which the Group is expected to benefit. This period is between three
to eight years, or the length of the contract if longer. Provision is also made for any impairment. All other development expenditure is written off as
incurred. Assets under the course of construction are not depreciated.
Licences comprise premiums paid for the acquisition of licences, while franchises represent costs incurred in obtaining franchise rights and franchise
goodwill arising on the acquisition of franchises. These are amortised on a straight-line basis over the life of the respective licence or franchise.
Pension related intangibles represent assets arising in relation to the Group’s right to manage and operate contracts where there is a defined benefit
pension scheme and it is not virtually certain that contributions will be recovered from the customer but where the Group’s obligation to contribute to the
scheme ends when the contract ends. The intangible assets represent the Group’s share of scheme net liabilities on the date that contracts commence
and are amortised on a straight-line basis over the life of the contract.
Property, plant and equipment
Assets held for use in the rendering of services, or for administrative purposes, are stated in the balance sheet at cost, net of accumulated depreciation
and any provision for impairment. Assets are grouped into classes of similar nature and use and separately disclosed except where this is not material.
Depreciation is provided on a straight-line basis at rates designed to reduce the assets to their residual value over their estimated useful lives.
The principal annual rates used are:
Freehold buildings
2.5%
Short-leasehold building improvements
The higher of 10% or the rate produced by the lease term
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment
15%–20%
10%–50%
10%
20%–33%
The higher of the rate produced by the lease term or useful life
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount
of the asset and is recognised in the income statement.
Impairment of tangible and intangible assets
Annually, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets
have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the
impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable
amount of the CGU to which the asset belongs. A CGU is the smallest group of assets that generates cash inflows from continuing use that are
largely independent of the cash flows of other assets or groups of assets. For the purpose of impairment testing, the goodwill acquired in a business
combination is allocated to cash-generating units that are expected to benefit from the synergies of the combination.
Recoverable amount is defined as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows
are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset for which the estimates of future cash flows have not been adjusted.
121
Financial statements 2. Significant accounting policies (continued)
If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced
to its recoverable amount. An impairment loss is recognised as an expense immediately. Impairment losses recognised in respect of CGUs are
allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the
unit (group of units) on a pro rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed
at each reporting date for indications that the loss has decreased or no longer exists. Where an impairment loss subsequently reverses, the carrying
amount of the asset (or CGU) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not
exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised for
the asset (or CGU) in prior years. A reversal of an impairment loss is recognised as income immediately.
Impairment losses and reversals are included within administrative expenses within the consolidated income statement.
Retirement benefit costs
Payments to defined contribution pension schemes are charged as an expense as they fall due.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial cost method, with actuarial
valuations being carried out at each balance sheet date.
Actuarial gains and losses are recognised in full in the period in which they occur. They are recognised outside the income statement and are presented
in the SOCI. The current service cost represents the increase in the present value of the scheme liabilities expected to arise from employee service in the
current period.
Past service cost is recognised immediately to the extent that the benefits are already vested, and is amortised on a straight-line basis over the
average period until the benefit vests. Gains and losses on curtailments or settlements are recognised in the period in which the curtailment or
settlement occurs.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for
unrecognised past service costs, and as reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to past
service cost, plus the present value of available refunds and reductions in future contributions to the scheme.
The economic benefit from refunds is only recognised to the extent that the Group has an unconditional right to receive a refund.
To the extent that an economic benefit is available as a reduction in contributions and there is a minimum funding requirement, the economic benefit
available as a reduction in contributions is calculated at the present value of:
a) the estimated future service cost in each year; less
b) the estimated minimum funding contributions required in respect of the future accrual and benefits in that year.
Defined benefit obligations arising from contractual obligations
Where the Group takes on a contract and assumes the obligation to contribute variable amounts to the defined benefit pension scheme throughout the
period of the contract, the Group’s share of the defined benefit obligation less its share of the pension scheme assets that it will fund over the period of
the contract is recognised as a liability at the start of the contract with a corresponding amount being recognised as an intangible asset. The intangible
asset, which reflects the Group’s right to manage and operate the contract, is amortised over the contract period. The Group’s share of the scheme
assets and liabilities is calculated by reducing the scheme assets and liabilities by a franchise adjustment. The franchise adjustment represents the
amount of scheme deficit that is expected to be funded outside the contract period. Subsequent actuarial gains and losses in relation to the Group’s
share of pension obligations are recognised outside the income statement and are presented in the SOCI.
Multi-employer pension schemes
Multi-employer pension schemes are classified as either a defined contribution pension scheme or a defined benefit pension scheme under the terms
of the scheme.
Derivative financial instruments and hedging activities
The Group enters into a variety of derivative financial instruments to manage the exposure to interest rate, foreign exchange risk and price risk, including
currency swaps, foreign exchange forward contracts, interest rate swaps and commodity future contracts. Further details of derivative financial
instruments are given in note 33.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value
at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective
as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group
designates certain derivatives as either hedges of the fair value of recognised assets or liabilities (fair value hedges) or hedges of highly probable
forecast transactions or hedges of firm commitments (cash flow hedges).
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Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 2. Significant accounting policies (continued)
At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its
risk management objectives and its strategy for undertaking various hedge transactions. Both at the inception of the hedge and on a periodic basis,
the Group assesses whether the hedging instrument that is used in a hedging relationship is highly effective in offsetting changes in fair values or cash
flows of the hedged item.
A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not
expected to be realised or settled within 12 months. Derivatives, which mature within 12 months, are presented as current assets or current liabilities.
Details of the fair values of the derivative instruments used for hedging purposes and movements in the hedging and translation reserve in equity are
detailed in the SOCI and described in note 33.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately, together with
any changes in the fair value of the hedged item that is attributable to the hedged risk. The change in the fair value of the hedging instrument and the
change in the hedged item attributable to the hedged risk are recognised in the line of the income statement relating to the hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or is sold, terminated,
exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk is
amortised to profit or loss from that date.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity. The gain or
loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are reclassified to profit or loss in the
periods when the hedged item affects profit or loss, in the same line of the income statement as the recognised hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or is sold, terminated,
exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and is recognised
when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain
or loss that was deferred in equity is recognised immediately in profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes
items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s
liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets and liabilities
and their carrying amounts for accounting purposes.
Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible
temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available
against which these items can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of an asset and
liability in a transaction other than a business combination and, at the time of the transaction, affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to control
the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be utilised.
Deferred tax is measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based upon tax
rates and legislation that have been enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income
statement, except where it relates to items charged or credited directly to equity, in which case the deferred tax is also recognised in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when
they relate to income taxes levied by the same tax authority where the Group intends to settle its current tax assets and liabilities on a net basis.
Share-based payment
The Group makes equity-settled share-based payments to certain employees and operates an HMRC approved Save As You Earn (SAYE) share option
scheme open to eligible employees which allows the purchase of shares at a discount. These are measured at fair value at the date of grant. The fair
value is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. SAYE options are
treated as cancelled when employees cease to contribute to the scheme, resulting in an acceleration of the remainder of the related expense.
123
Financial statements 2. Significant accounting policies (continued)
Where the fair value of share options requires the use of a valuation model, fair value is measured by use of the Binomial Lattice or Monte Carlo
Simulation models depending on the type of scheme, as set out in note 38. The expected life used in the models has been adjusted, based on
management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Where relevant, the value
of the option has also been adjusted to take account of market conditions applicable to the option.
Inventories
Inventories are stated at the lower of cost and net realisable value and comprise service spares, parts awaiting installation and work in progress for
projects undertaken for customers where payment is received on completion. Cost comprises direct materials and, where applicable, direct labour
costs that have been incurred in bringing the inventories to their present location and condition.
Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision
for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to
collect all amounts due according to the original terms of the contract. Significant financial difficulties of the debtor, probability that the debtor will
enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that a trade receivable is impaired.
The amount of the provision is based on management’s best estimate of the recoverable amount. The carrying amount of the asset is reduced through
the use of an allowance for doubtful debts and the amount of the loss is recognised in the income statement within administrative expenses. When a
trade receivable is uncollectible, it is written off against the allowance for doubtful debts. Subsequent recoveries of amounts previously written off are
credited against administrative expenses.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and balances with banks and similar institutions, which are readily convertible to known amounts
of cash and which are subject to insignificant changes in value and have a maturity of three months or less from the date of acquisition. This definition
is also used for the consolidated cash flow statement.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee.
All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at fair value or, if lower, at the present value of minimum lease payments
determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation.
Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the
remaining balance of the liability. Finance charges are charged directly to the income statement, unless they are directly attributable to a qualifying
asset, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs (see below).
Total rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Loans
Loans are stated at amortised cost using the effective interest rate method. Accrued interest is recorded separately from the associated borrowings
within current liabilities.
Loans are described as non recourse loans and classified as such only if no Group company other than the relevant borrower has an obligation,
under a guarantee or other arrangement, to repay the debt.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a
substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially
ready for their intended use or sale.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event, and it is probable that the Group will be required to settle
that obligation. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the balance sheet date.
Net investments in foreign operations
Exchange differences arising on monetary items that form part of the Group’s net investment in foreign operations are initially recognised in equity
and accumulated in the hedging and translation reserve and reclassified from equity to profit or loss on disposal of the net investment.
Dividends
Dividends are recorded in the Group’s consolidated financial statements in the period in which they are declared, appropriately authorised and
no longer at the discretion of the Company.
124
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 2. Significant accounting policies (continued)
Segmental information
Segmental information is based on internal reports about components of the Group that are regularly reviewed by the Group’s Chief Operating Decision
Maker in order to allocate resources to the segments and to assess their performance.
Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of revenue as a whole.
Net finance costs are not presented for each operating segment as they are reviewed on a consolidated basis by the Group’s Chief Operating Decision
Maker.
Items excluded from segmental results comprise corporate expenses. Specific corporate expenses are allocated to the corresponding segments.
Segment assets comprise goodwill, other intangible assets, property, plant and equipment, inventories, trade and other receivables (excluding
corporation tax recoverable) and any retirement benefit asset. Segment liabilities comprise trade and other payables and retirement benefit obligations.
3. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Group’s accounting policies
In the process of applying the Group’s accounting policies, which are described in note 2 above, management has made the following judgements
that have the most significant effect on the amounts recognised in the financial statements (apart from those involving estimations which are dealt
with below).
Revenue and profit recognition of long-term project-based contracts
Revenue and profit is recognised for certain long-term project-based contracts based on the stage of completion of the contract activity.
The assessment of the stage of completion requires the exercise of judgement and is measured by the proportion of costs incurred to estimated
whole life contract costs, except where whole life contract costs exceed the contract value, in which case the excess is expensed immediately.
Capitalisation of internally generated intangible assets
When the Group creates an intangible asset where the future economic benefits are greater than the expected costs, the development costs are
capitalised if they meet the other requirements of IAS 38 Intangible Assets as set out in the accounting policies section above.
Separation of income statement items from underlying results
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company’s profitability. In practice,
these are commonly referred to as “exceptional” items, but this is not a concept defined by IFRS and therefore there is a level of judgement involved
in determining what to include in underlying profit. We consider items which are material, non-recurring and outside of the normal operating practice
of the Company to be suitable for separate presentation.
Key sources of estimation uncertainty
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk
of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated.
The value in use calculation involves an estimation of the future cash flows of cash-generating units and also the selection of appropriate discount rates,
which involves judgement, to calculate present values (see note 20). The carrying value of goodwill is £1,270.8m (2012 restated: £1,312.1m) at the
balance sheet date.
Retirement benefit obligations
The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, future returns on assets and future
contribution rates (see note 34). The value of net retirement benefit obligations at the balance sheet date is an asset of £52.9m (2012 restated: £31.7m).
Details of the impact of changes in assumptions relating to retirement benefit obligations are disclosed in note 34.
Business combinations
The calculation of fair values associated with business combinations requires the use of judgement in determining the future economic inflows and
outflows associated with the acquired assets and liabilities. This includes the estimation of contingent deferred consideration and intangibles arising on
acquisition. As permitted by IFRS 3 (2008), provisional amounts are recognised for acquired net assets during the measurement period where complete
information about facts and circumstances that existed at the acquisition date is not available at the reporting date.
Provisions for onerous contracts
Determining whether provisions are required for loss making onerous contracts requires an estimate to be made of the future profitability of the given
contract, based on various interdependent factors. Historically these provisions have been rare, but in the current year an exceptional charge was made
for onerous contracts, with further details provided in notes 11 and 30.
125
Financial statements 4. Prior year restatement
Changes in accounting policies
IFRS 11 and the revisions to IAS 19 were adopted in 2013. IFRS 11 removes the option for proportional consolidation of joint ventures and instead
requires equity accounting. The revisions to IAS 19 require the pension interest return to be calculated using the value of scheme assets multiplied by
the discount rate rather than the expected rate of return. Both of these changes were applied retrospectively, with the date of initial application being
1 January 2012, in accordance with the transition provisions of the individual standards and IAS 8 Accounting Policies, Changes in Accounting Estimates
and Errors.
Reallocation of costs
In 2012 £114m of costs previously included in administrative expenses have been reallocated to cost of sales, as in the view of the Group,
this classification better reflects the underlying nature of these items.
Acquisition adjustments
After a review of the provisional acquisition accounting for Vertex Public Services Limited and DMS Maritime Pty. Limited, recognised in the
2012 accounts, the comparative information in relation to these acquisitions has been adjusted retrospectively.
Impact of prior year restatement on summarised financial statements
As disclosed
£m
Acquisition
adjustments
£m
IFRS 11
£m
IAS 19*
£m
Restated
£m
Changes in accounting policies
4,913.0
287.6
12.4
51.1
(49.1)
302.0
(56.1)
245.9
49.94p
(84.5)
161.4
2,103.4
1,143.7
3,247.1
(997.8)
(1,120.4)
(2,118.2)
1,128.9
1,128.9
303.4
(89.2)
(261.4)
(47.2)
(9.0)
–
–
–
–
–
–
–
–
–
–
–
(0.7)
–
(0.7)
–
0.7
0.7
–
–
–
–
–
–
–
(852.9)
(12.9)
(2.7)
–
0.5
(15.1)
15.1
–
–
–
–
(227.0)
(142.4)
(369.4)
130.9
238.5
369.4
–
–
(82.5)
85.2
1.6
4.3
0.1
–
(2.5)
(3.3)
–
–
(5.8)
0.9
(4.9)
4,060.1
272.2
6.4
51.1
(48.6)
281.1
(40.1)
241.0
(1.00)p
48.94p
4.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(79.6)
161.4
1,875.7
1,001.3
2,877.0
(866.9)
(881.2)
(1,748.1)
1,128.9
1,128.9
220.9
(4.0)
(259.8)
(42.9)
(8.9)
Year ended 31 December 2012
Income statement
Revenue
Operating profit
Investment revenue
Exceptional other gain
Finance costs
Profit before tax
Tax
Profit for the year
* IAS 19 Revised adjustment after application of IFRS 11
Earnings per share
Other comprehensive income for the year
Total comprehensive income for the year
Balance sheet
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
Cash flow
Net cash inflow from operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Net exchange loss
126
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 4. Prior year restatement (continued)
At 1 January 2012
Balance sheet
Non-current assets
Current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net assets
Equity
5. Segmental information
Changes in accounting policies
As disclosed
£m
Acquisition
adjustments
£m
IFRS 11
£m
IAS 19
£m
Restated
£m
2,053.1
1,129.0
3,182.1
(1,061.6)
(1,116.7)
(2,178.3)
1,003.8
1,003.8
–
–
–
–
–
–
–
–
(181.0)
(170.1)
(351.1)
138.9
212.2
351.1
–
–
–
–
–
–
–
–
–
–
1,872.1
958.9
2,831.0
(922.7)
(904.5)
(1,827.2)
1,003.8
1,003.8
Information reported to the Chief Operating Decision Maker for the purposes of resource allocation and assessment of segment performance focuses
on the geographic spread of the business in order to gain advantage of local market and customer understanding. In addition, due to its strategic
importance to the Group, the global Business Process Outsourcing (BPO) business is reviewed separately as a single unit. The Group’s reportable
operating segments under IFRS 8 Operating Segments are:
Reportable segments
UK & Europe
Americas
AMEAA
Global Services
Operating segments
UK and Europe frontline services in areas including home affairs, defence, health, transportation
and local government direct services
US defence, intelligence and federal civilian agencies operations, and Canadian operations
Frontline contracts in Australasia, Middle East, Asia (including Hong Kong and India) and Africa
Global BPO middle and back office services
The reportable segments will change in 2014 to reflect the separation of the UK & Europe segment into two new segments, UK Central Government
and UK Local and Regional Government, and the existing segment will no longer exist.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2.
Geographic information
Year ended 31 December
United Kingdom
United States
Australia
Other countries
Total
Revenue
2013
£m
2,071.5
706.5
869.2
640.9
4,288.1
Non-current
assets*
2013
£m
784.1
423.7
167.0
406.5
1,781.3
Revenue
2012
(restated)
£m
2,008.7
694.4
700.3
656.7
4,060.1
Non-current
assets*
2012
(restated)
£m
781.2
437.5
192.5
421.7
1,832.9
* Non-current assets exclude financial instruments, deferred tax assets and loans to joint ventures.
Revenues from external customers are attributed to individual countries on the basis of the location of the customer.
127
Financial statements 5. Segmental information (continued)
Information about major customers
The Group has two major governmental customers which each represent more than 10% of Group revenues. The customers’ revenues were
respectively £1,807.0m (2012 restated: £1,727.3m) across UK & Europe and Global Services and £643.2m (2012 restated: £649.7m) within the
Americas segment.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:5. Segmental information (continued)
Year ended 31 December 2013
Adjusted revenue
Less: Share of joint venture revenue
Revenue
Result
Operating profit before exceptional items
Exceptional net profit on disposal of
subsidiaries and operations
Other exceptional operating items
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit for the year
Supplementary information
Interest in the profit of joint ventures
Depreciation
Amortisation of intangibles arising on acquisition
Other amortisation
Total amortisation
Segment assets
Interests in joint ventures
Other segment assets
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities
Unallocated liabilities
Consolidated total liabilities
UK &
Europe
£m
2,556.9
(770.8)
1,786.1
133.4
19.2
(92.3)
60.3
42.7
(24.2)
(0.3)
(2.9)
(3.2)
1.4
636.5
637.9
Americas
£m
765.3
(0.7)
764.6
47.5
–
–
47.5
–
(2.7)
(11.3)
(1.3)
(12.6)
0.2
558.3
558.5
AMEAA
£m
1,049.5
(84.3)
965.2
77.8
–
(10.1)
67.7
4.4
(15.3)
(2.4)
(5.3)
(7.7)
6.5
418.7
425.2
Global
Services
£m
772.2
–
772.2
25.5
–
(6.0)
19.5
–
(11.9)
(7.4)
(13.2)
(20.6)
–
846.7
846.7
Corporate
£m
–
–
–
(49.9)
–
(1.3)
(51.2)
–
–
–
(5.2)
(5.2)
–
126.0
126.0
(229.2)
(70.3)
(147.7)
(180.5)
(61.3)
Total
£m
5,143.9
(855.8)
4,288.1
234.3
19.2
(109.7)
143.8
5.2
(42.4)
106.6
(11.2)
95.4
47.1
(54.1)
(21.4)
(27.9)
(49.3)
8.1
2,586.2
2,594.3
214.6
2,808.9
(689.0)
(1,024.0)
(1,713.0)
128
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 5. Segmental information (continued)
Year ended 31 December 2012 (restated)
Adjusted revenue
Less: Share of joint venture revenue
Revenue
Result
Operating profit before exceptional items
Exceptional net profit on disposal of
subsidiaries and operations
Other exceptional operating items
Operating profit
Investment revenue
Exceptional other gain
Finance costs
Profit before tax
Tax
Profit for the year
Supplementary information
Interest in the profit of joint ventures
Depreciation
Amortisation of intangibles arising on acquisition
Other amortisation
Total amortisation
Segment assets
Interests in joint ventures
Other segment assets
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities
Unallocated liabilities
Consolidated total liabilities
UK &
Europe
£m
2,561.1
(723.4)
1,837.7
166.0
31.0
–
197.0
51.1
(19.7)
(0.4)
(3.2)
(3.6)
4.4
674.2
678.6
Americas
£m
753.4
(0.7)
752.7
41.5
–
–
41.5
0.1
(2.9)
(13.7)
(0.8)
(14.5)
0.3
604.3
604.6
AMEAA
£m
883.0
(128.8)
754.2
58.1
–
–
58.1
11.3
(5.7)
(0.3)
(2.0)
(2.3)
7.2
453.7
460.9
Global
Services
£m
715.5
–
715.5
50.6
(25.4)
–
25.2
–
(17.7)
(9.7)
(11.8)
(21.5)
–
844.9
844.9
Corporate
£m
–
–
–
(44.6)
–
(5.0)
(49.6)
–
(0.1)
–
(3.1)
(3.1)
–
74.2
74.2
(313.1)
(93.7)
(146.3)
(256.1)
(28.4)
Total
£m
4,913.0
(852.9)
4,060.1
271.6
5.6
(5.0)
272.2
6.4
51.1
(48.6)
281.1
(40.1)
241.0
62.5
(46.1)
(24.1)
(20.9)
(45.0)
11.9
2,651.3
2,663.2
213.8
2,877.0
(837.6)
(910.5)
(1,748.1)
6. List of principal undertakings
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation
to undertakings whose results or financial position, in the opinion of the Directors, principally affected the financial statements.
A complete list of subsidiary and associated undertakings will be attached to the next Serco Group plc annual return to Companies House.
The percentage of equity capital held directly or indirectly by Serco Group plc is shown below, together with the location of incorporation and operation.
The voting rights are the same as the percentage holding.
Principal subsidiaries
United Kingdom
Australia
India
USA
Joint venture undertakings
United Kingdom
Serco Limited
NPL Management Limited
Serco Australia Pty Limited
Serco BPO Private Limited
Serco Inc.
AWE Management Limited
Northern Rail Holdings Limited
2013
100%
100%
100%
100%
100%
2013
33%
50%
All joint ventures are accounted for using the equity method, none have quoted shares and there are no significant restrictions on the ability of
any of the joint ventures to pay dividends or repay amounts owed. All the subsidiaries of the Group have been consolidated.
All the principal subsidiaries of Serco Group plc and its joint venture undertakings are engaged in the provision of support services.7. Joint
2012
100%
100%
100%
100%
100%
2012
33%
50%
129
Financial statements
7. Joint ventures
The Group has certain arrangements where control is shared equally with one or more parties. As each arrangement is a separate legal entity and legal
ownership and control are equal with all other parties, there are no significant judgements required to be made.
Summarised financial information of the joint ventures which are material to the Group and an aggregation of the other joint ventures in which the Group
has an interest is as follows:
31 December 2013
Summarised financial information
Revenue
Operating profit
Net investment revenue/(finance costs)
Income tax expense
Profit from continuing operations
Other comprehensive income
Total comprehensive income
Dividends received from joint venture
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of group ownership
Carrying amount of investment
Supplementary material
Cash and cash equivalents
Current financial liabilities excluding trade and other payables
and provisions
Non-current financial liabilities excluding trade and other
payables and provisions
Depreciation and amortisation
Interest income
Interest expense
AWE
Management
Limited
(100% of results)
£m
Northern
Rail Holdings
Limited
(100% of results)
£m
Group portion
of material
joint ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
1,023.6
650.4
666.4
189.4
77.7
0.3
(11.1)
66.9
–
66.9
25.5
454.2
163.2
(147.3)
(453.6)
16.5
33%
5.5
33.6
0.6
(9.4)
24.8
(2.6)
22.2
14.2
12.0
90.2
(95.2)
(9.2)
(2.2)
50%
(1.1)
42.7
0.4
(8.4)
34.7
(1.3)
33.4
39.7
157.4
99.5
(96.7)
(155.8)
4.4
–
4.4
16.2
(0.8)
(3.0)
12.4
3.4
15.8
11.8
20.1
36.7
(34.9)
(18.2)
3.7
–
3.7
AWE
Management
Limited
(100% of results)
£m
Northern
Rail Holdings
Limited
(100% of results)
£m
Group portion
of material
joint ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
39.3
(7.5)
–
–
0.3
–
49.0
(5.2)
(3.0)
(3.4)
0.4
–
37.6
(5.1)
(1.5)
(1.7)
0.3
–
12.7
(1.5)
(4.4)
(3.3)
0.1
(0.2)
Group
portion
total
£m
855.8
58.9
(0.4)
(11.4)
47.1
2.1
49.2
51.5
177.5
136.2
(131.6)
(174.0)
8.1
–
8.1
Group
portion
total
£m
50.3
(6.6)
(5.9)
(5.0)
0.4
(0.2)
* Total results of the joint ventures multiplied by the respective proportion of Group ownership.
The financial statements of Northern Rail Holdings Limited are for a period which is different from that of the Group, being for the 52 week period ended
4 January 2014. The 52 week period reflects the joint venture’s internal reporting structure and is sufficiently close so as to not require adjustment to
match that of the Group.
130
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 7. Joint ventures (continued)
Certain employees of the groups headed by AWE Management Limited and Northern Rail Holdings Limited are members of sponsored defined benefit
pension schemes. Given the significance of the schemes to understanding the position of the joint ventures the following key disclosures are made:
Main assumptions: 2013
Rate of salary increases (%)
Inflation assumption (CPI, %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustments*
Related asset, right to reimbursement
Net retirement benefit obligation
AWE
Management
Limited
Northern
Rail Holdings
Limited
3.5
2.7
4.8
22.7
24.5
£m
(1,416.3)
962.7
(453.6)
–
–
453.6
–
3.4
2.7
4.7
N/A
N/A
£m
(770.8)
564.2
(206.6)
82.6
120.2
–
(3.8)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The Northern Rail defined benefit pension scheme uses a mortality rate multiplier of 98% based on the S1 normal males (heavy) table, adjusted for the
geographic location of members.
AWE Management Limited is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of Northern Rail Holdings Limited covers only that portion of the deficit that is expected to be funded over the term
of the franchise arrangement the entity operates under. In addition, the defined benefit position reflects an adjustment in respect of funding required
to be provided by employees.
31 December 2012
Summarised financial information
Revenue
Operating profit
Net investment revenue/(finance costs)
Income tax expense
Profit from continuing operations
Other comprehensive income
Total comprehensive income
Dividends received from joint venture
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of group ownership
Carrying amount of investment
AWE
Management
Limited
(100% of results)
£m
Northern
Rail Holdings
Limited
(100% of results)
£m
Group portion
of material
joint ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
973.5
106.5
0.6
(17.4)
89.7
–
89.7
30.9
644.1
175.5
(149.5)
(644.1)
26.0
33%
8.7
597.2
623.1
229.8
34.8
0.4
(5.4)
29.8
4.8
34.6
17.1
10.8
87.1
(92.7)
(1.2)
4.0
50%
2.0
52.9
0.4
(8.5)
44.8
2.4
47.2
48.0
220.1
102.1
(96.2)
(215.3)
10.7
–
10.7
24.3
(0.6)
(6.0)
17.7
(3.7)
14.0
32.6
21.4
40.3
(34.7)
(25.8)
1.2
–
1.2
* Total results of the joint ventures multiplied by the respective proportion of Group ownership.
Group
portion
total
£m
852.9
77.2
(0.2)
(14.5)
62.5
(1.3)
61.2
80.6
241.5
142.4
(130.9)
(241.1)
11.9
–
11.9
131
Financial statements 7. Joint ventures (continued)
Supplementary material
Cash and cash equivalents
Current financial liabilities excluding trade and other payables
and provisions
Non-current financial liabilities excluding trade and other
payables and provisions
Depreciation and amortisation
Interest income
Interest expense
AWE
Management
Limited
(100% of results)
£m
Northern
Rail Holdings
Limited
(100% of results)
£m
Group portion
of material
joint ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
90.4
(9.3)
–
–
0.6
–
31.0
(5.6)
–
(5.7)
0.4
–
45.6
(5.9)
–
(2.9)
0.4
–
10.2
(2.8)
(6.5)
(3.1)
0.3
–
Group
portion
total
£m
55.8
(8.7)
(6.5)
(6.0)
0.7
–
* Total results of the joint ventures multiplied by the respective proportion of Group ownership.
The financial statements of Northern Rail Holdings Limited are for the 52 week period ended 5 January 2013.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures:
Main assumptions: 2012
Rate of salary increases (%)
Inflation assumption (CPI, %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustments*
Related asset, right to reimbursement
Net retirement benefit obligation
AWE
Management
Limited
Northern
Rail Holdings
Limited
3.40
2.20
4.30
22.6
24.4
£m
(1,494.9)
850.9
(644.0)
–
–
644.0
–
3.40
2.20
4.30
N/A
N/A
£m
(782.3)
506.6
(275.7)
110.3
165.4
–
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The Northern Rail defined benefit pension scheme uses a mortality rate multiplier of 98% based on the S1 normal males (heavy) table, adjusted for the
geographic location of members.
IFRS 11 was adopted in 2013. IFRS 11 removes the option for proportional consolidation of joint ventures and instead requires equity accounting
for such entities, which is applied retrospectively from 1 January 2012. A breakdown of the assets and liabilities of all joint ventures at 1 January 2012
is as follows:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
132
£m
220.4
171.6
(140.4)
(215.5)
36.1
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements
8. Acquisitions
Prior year acquisitions
Deferred consideration payments in relation to prior year acquisitions were made in 2013 totalling £18.6m. This represented £11.9m in respect
of Intelenet and £6.7m in relation to The Listening Company. During 2012, a cash payment of £6.6m was made in respect of deferred contingent
consideration payable following the acquisition of The Listening Company Limited in 2011.
After a review of the provisional acquisition accounting for Vertex Public Services Limited as recognised in the 2012 accounts, the comparative
information in relation to this acquisition has been adjusted retrospectively to increase the fair value of deferred tax assets by £2.3m offset by a
decrease in goodwill of £2.3m. Following a review of the provisional acquisition accounting for DMS Maritime Pty Limited as reported in the 2012
accounts, the comparative information in relation to this acquisition has been adjusted retrospectively to reduce the fair value of intangible assets
recognised by £7.9m, offset by an increase in goodwill of £7.2m and a decrease in the deferred tax liability of £0.7m. As a result of the failure to
meet earn-out criteria, an adjustment was made to the deferred consideration arising on the Intelenet acquisition in 2011 of £10.3m.
A summary of the significant 2012 acquisitions, together with the other acquisitions in aggregate is as follows:
Fair value of net assets acquired:
Intangible assets
Property, plant and equipment
Inventories
Deferred tax asset
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Tax liabilities
Deferred tax liability
Provisions
Loans
Bank overdraft
Retirement benefit obligations
Net (liabilities)/assets acquired
Gain on remeasurement to fair value
Goodwill
Total consideration
Satisfied by:
Cash
Contingent consideration
Total consideration
Net cash outflow arising on acquisition:
Purchase consideration
Cash and cash equivalents acquired
Net cash outflow arising on current year acquisitions
Consideration paid in respect of previous periods
Acquisition of subsidiaries, net of cash acquired
Vertex Public
Services Limited
2012
£m
DMS Maritime
Pty Limited
2012
£m
Other acquisitions
(in aggregate)
2012
£m
7.4
0.6
–
3.8
27.8
–
(23.3)
–
–
(4.9)
–
–
(13.4)
(2.0)
–
57.5
55.5
55.5
–
55.5
55.5
–
55.5
32.7
4.8
5.5
–
10.0
–
–
–
(10.3)
(0.4)
(14.8)
(0.4)
–
27.1
(51.1)
93.1
69.1
69.1
–
69.1
69.1
–
69.1
4.3
0.6
–
–
2.1
0.8
(1.2)
(0.1)
–
(0.7)
–
–
–
5.8
–
9.4
15.2
11.4
3.8
15.2
11.4
(0.8)
10.6
Total
2012
£m
44.4
6.0
5.5
3.8
39.9
0.8
(24.5)
(0.1)
(10.3)
(6.0)
(14.8)
(0.4)
(13.4)
30.9
(51.1)
160.0
139.8
136.0
3.8
139.8
136.0
(0.8)
135.2
6.6
141.8
133
Financial statements 9. Disposals
On 27 November 2013, the Group disposed of its London streets maintenance and UK transport technology business. On 4 October 2013, the Group
disposed of its occupational health business. Details of these transactions are given below:
The net assets at the date of disposal were:
Goodwill
Other intangible assets
Property, plant and equipment
Inventories
Deferred tax asset
Trade and other receivables
Loans receivable
Cash and cash equivalents
Trade and other payables
Finance lease obligations
Bank overdrafts
Provisions
Other loans
Retirement benefit obligations
Deferred tax liabilities
Net assets disposed
The profit/(loss) on disposal is calculated as follows:
Cash consideration
Less:
Net assets disposed
Disposal-related costs
Profit/(loss) on disposal
The net cash inflow/(outflow) arising on disposals is as follows:
Consideration received
Less:
Deferred consideration
Cash and cash equivalents disposed
Disposal-related costs paid during the period
Net cash inflow/(outflow) on disposal
Transport
2013
£m
Occupational
health
2013
£m
14.0
–
0.4
0.3
–
7.5
–
–
(3.5)
–
–
(0.3)
–
–
–
18.4
44.9
(18.4)
(3.3)
23.2
44.9
(2.3)
–
(2.4)
40.2
1.7
0.5
0.2
–
–
3.0
–
–
(0.7)
–
–
–
–
–
–
4.7
3.5
(4.7)
(2.7)
(3.9)
3.5
–
–
(1.3)
2.2
Other
2013
£m
–
–
0.1
–
–
0.5
–
–
–
–
–
–
–
–
–
0.6
0.8
(0.6)
(0.3)
(0.1)
0.8
–
–
(2.6)
(1.8)
During the year, £2.5m of disposal costs in relation to a prior year transaction were cash settled.
10. Revenue
An analysis of the Group’s revenue is as follows:
Year ended 31 December
Rendering of services
Revenue from long-term project-based contracts
Revenue as disclosed in the consolidated income statement
Investment revenue (note 14)
Operating lease income
Total revenue as defined in IAS 18
134
Total
2013
£m
15.7
0.5
0.7
0.3
–
11.0
–
–
(4.2)
–
–
(0.3)
–
–
–
23.7
49.2
(23.7)
(6.3)
19.2
49.2
(2.3)
–
(6.3)
40.6
Total
2012
£m
86.8
4.6
19.0
–
5.2
53.7
25.9
1.4
(15.6)
(6.2)
(1.3)
(0.1)
(0.1)
(50.5)
(5.2)
117.6
141.6
(117.6)
(18.4)
5.6
141.6
–
(1.4)
(9.2)
131.0
2013
£m
4,214.0
74.1
4,288.1
5.2
1.0
4,294.3
2012
(restated)
£m
3,970.1
90.0
4,060.1
6.4
0.9
4,067.4
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 11. Exceptional items
Current year exceptional items
Exceptional items are non-recurring items of financial performance that are material to the results of the Group either by virtue of size or nature.
We believe these items require separate disclosure on the face of the income statement to assist in the understanding of the underlying performance
of the Group.
Net profit on disposal of subsidiaries and operations
Year ended 31 December
Gain on disposal of UK transport maintenance business
Loss on disposal of occupational health business
Loss on disposal of Ascot College
Net profit on disposal of subsidiaries and operations
2013
£m
23.2
(3.9)
(0.1)
19.2
In November 2013 the Group completed the sale of its London streets maintenance and UK transport technology business to Cubic Corporation which,
after disposal-related costs, resulted in a profit on disposal of £23.2m. This was offset by a loss on the disposal of the occupational health business in
October 2013 of £3.9m and Ascot College of £0.1m, which was sold in December 2013.
Other exceptional operating items
During the year an investigation was undertaken by the Ministry of Justice (MoJ) into the billing practices in respect of our Electronic Monitoring
(EM) contract. Additionally, the Cabinet Office undertook a wider review across other Serco contracts with UK Central Government. 48% of 2013 contract
revenues in the UK & Europe division were covered by reviews undertaken by Central Government and the Ministry of Justice. Serco has also agreed
with the UK Government to undertake a process of corporate renewal, to strengthen governance and transparency which includes the separation of the
UK & Europe division into two. The audits, reviews and corporate renewal processes all incurred one-off costs that are deemed to be exceptional items,
which are set out in the table below together with other items identified for separate presentation.
Year ended 31 December
Settlement amounts relating to UK Government reviews
Costs associated with UK Government reviews
UK clinical health contract provisions
Restructuring
Asset impairment
Deferred consideration relating to prior year acquisition
Other exceptional operating items
UK Government
review related
items
2013
£m
(66.3)
(11.6)
–
–
–
–
(77.9)
Other
2013
£m
–
–
(17.6)
(14.9)
(9.6)
10.3
(31.8)
Total
2013
£m
(66.3)
(11.6)
(17.6)
(14.9)
(9.6)
10.3
(109.7)
Settlement amounts relating to UK Government reviews
In December 2013, following a review of the billing arrangements on the EM contract by the Ministry of Justice, a settlement of £64.3m was reached
in respect of contractual claims. In addition, a £2.0m settlement was reached on the Prisoner Escort and Custody Services (PECS) contract which was
also subject to Government review to reflect repayment of past profit earned on this contract. The settlement was full and final in respect of contractual
claims with the proviso that additional payments might be sought in limited circumstances, such as if criminality were to be established. Serco continues
to cooperate fully with the ongoing investigations by the Serious Fraud Office.
Costs associated with UK Government reviews
Since July 2013 there have been external adviser and other directly related incremental costs that amount to £11.6m.
UK clinical health contract provisions
During the year we completed a review of the clinical health operations in the UK. As a result, we will exit two contracts early. These contracts, together
with a third loss-making contract, require contract provisions for estimated losses in future years and the impairment of operating assets which in total
amounts to a non-cash exceptional charge of £17.6m.
Restructuring
As a result of a wider assessment of the Group’s operations, a restructuring charge of £14.9m was taken, with £13.3m directly related to the corporate
renewal process.
Asset impairment
As a result of a review of under-performing businesses and operations, an impairment charge of £9.6m was taken in relation to the carrying value
of fixed assets in Great Southern Railway, a rail tourism business based in Australia, reflecting more challenging conditions in that market.
Adjustment to prior year acquisitions
On assessment against the earn-out criteria, an adjustment was made to the deferred consideration arising on the Intelenet acquisition in 2011
of £10.3m.
135
Financial statements 11. Exceptional items (continued)
Tax impact of above items
The tax impact of these items was a tax credit of £28.8m.
Prior year exceptional items
Net profit on disposal of subsidiaries and operations
Year ended 31 December
Net profit on disposal of subsidiaries and operations
2012
£m
5.6
During the prior year the Group disposed of its Technical Services business which provided consulting and project solutions, resulting in a profit of
£57.6m. In addition, the German Serco business was sold as well as the UK data hosting operations and education software businesses, resulting in
losses of £27.7m, £11.5m and £12.8m respectively.
Other exceptional operating items
Year ended 31 December
Exceptional donation to Serco Foundation
2012
£m
5.0
To mark Serco’s 25th year as a publicly traded company dedicated to service excellence, we established the Serco Foundation as an independent
charitable foundation. An exceptional payment of £5.0m was made in the prior year to establish the charitable foundation.
Exceptional other gain: gain on step acquisition accounting of joint venture
Year ended 31 December
Gain on step acquisition accounting of joint venture
2012
£m
51.1
On 16 November 2012 Serco acquired the remaining 50% equity stake in DMS, taking its equity ownership to 100%. DMS was formerly accounted for as
a joint venture and following the acquisition of further shares it became a wholly owned subsidiary. In accordance with IFRS 3 (Revised 2008) Business
Combinations, before accounting for the purchase of the remaining equity stake, the value of the previously held 50% shareholding was restated to fair
value on the acquisition date. This resulted in an exceptional gain of £51.1m being recognised in the income statement.
Tax impact of above items
The tax impact of these items was a credit in the income statement of £6.5m.
12. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
Profit on disposal of property, plant and equipment
Loss on disposal of intangible assets
Depreciation and impairment of property, plant and equipment (note 22)
Amortisation of intangible assets – arising on acquisition (note 21)
Amortisation and impairment of intangible assets – other (note 21)
Staff costs (note 13)
Exceptional net profit on disposal of subsidiaries and operations (note 11)
Other exceptional operating items (note 11)
Allowance for doubtful debts charged/(credited) to income statement (note 24)
Net foreign exchange credit
Movement on non-designated hedges and reclassified cash flow hedges
Minimum lease payments recognised as an operating lease expense
Operating lease income from sub-leases (note 10)
136
2013
£m
20.0
–
1.0
54.1
21.4
27.9
1,999.2
(19.2)
109.7
0.4
(7.7)
6.6
117.6
(1.0)
2012
(restated)
£m
23.5
(0.9)
–
46.1
24.1
20.9
1,911.9
(5.6)
5.0
(0.8)
(7.5)
7.1
101.5
(0.9)
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements Amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and non-audit services are
shown below.12. Operating profit (continued)
Year ended 31 December
Fees payable to the Company’s Auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s Auditor and their associates for other services to the Group:
– Audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
– Audit-related assurance services
– Taxation compliance services
– Other taxation advisory services
– Other services
Total non-audit fees
2013
£m
1.1
0.8
1.9
0.2
0.1
0.3
0.3
0.9
2012
£m
0.9
0.8
1.7
0.1
0.3
0.3
0.4
1.1
Fees payable to Deloitte LLP and their associates for non-audit services to the Company are not required to be disclosed separately because the
consolidated financial statements are required to disclose such fees on a consolidated basis.
Details of the company’s policy on the use of auditors for non-audit services and how the auditor’s independence and objectivity was safeguarded
are set out in the Audit Committee Report on page 78. No services were provided pursuant to contingent fee arrangements.
13. Staff costs
The average monthly number of employees (including Executive Directors) was:
Year ended 31 December
UK & Europe
Americas
AMEAA
Global Services
Unallocated
Aggregate remuneration comprised:
Year ended 31 December
Wages and salaries
Social security costs
Other pension costs (note 34)
Share-based payment expense (note 38)
14. Investment revenue
Year ended 31 December
Interest receivable on other loans and deposits
Net interest receivable on retirement benefit obligations (note 34)
Movement in discount on other debtors
2013
Number
20,155
9,293
9,952
55,464
116
94,980
2013
£m
1,752.5
135.2
108.6
1,996.3
2.9
1,999.2
2013
£m
2.4
2.3
0.5
5.2
2012
(restated)
Number
23,403
8,854
8,465
48,672
141
89,535
2012
(restated)
£m
1,680.4
133.9
85.5
1,899.8
12.1
1,911.9
2012
(restated)
£m
2.5
3.9
–
6.4
137
Financial statements
15. Finance costs
Year ended 31 December
Interest payable on non recourse loans
Interest payable on obligations under finance leases
Interest payable on other loans
Facility fees and other charges
Movement in discount on provisions and deferred consideration
16. Tax
16 (a) Income tax recognised in the income statement
Year ended 31 December
Current income tax
Current income tax expense
Adjustments in respect of prior years
Deferred tax
Current year
Adjustments in respect of prior years
Before
exceptional items
2013
£m
Exceptional
items
2013
£m
31.6
(9.2)
19.7
(2.1)
40.0
–
(0.2)
(25.4)
(3.2)
(28.8)
Total
2013
£m
31.6
(9.4)
(5.7)
(5.3)
11.2
2013
£m
0.8
2.5
31.5
6.1
1.5
42.4
2012
(restated)
£m
0.9
2.8
30.8
12.2
1.9
48.6
Before
exceptional items
2012
(restated)
£m
Exceptional
items
2012
£m
Total
2012
(restated)
£m
37.5
(5.5)
9.5
5.1
46.6
(5.1)
–
(1.4)
–
(6.5)
The tax expense for the year can be reconciled to the profit in the consolidated income statement as follows:
Year ended 31 December
Profit before tax
Tax calculated at a rate of 23.3% (2012: 24.5%)
Expenses/(income) not deductible for
tax purposes
Unrelieved tax losses
Effect of the use of unrecognised tax losses
Unprovided deferred tax
Impact of changes in statutory tax rates
Overseas rate differences
Other non-taxable income
Step acquisition accounting of joint venture
Disposal of Serco GmbH
Statutory tax benefits
Adjustments in respect of prior years
Adjustments in respect of equity
accounted investments
Tax charge/(credit)
Before
exceptional items
2013
£m
Exceptional
items
2013
£m
197.1
45.9
(0.5)
2.9
(0.1)
0.9
4.1
10.9
–
–
–
(1.8)
(11.3)
(11.0)
40.0
(90.5)
(21.1)
0.6
–
–
–
3.6
(0.8)
(2.4)
–
–
(5.3)
(3.4)
–
(28.8)
Before
exceptional items
2012
(restated)
£m
Exceptional
items
2012
£m
229.4
56.2
1.4
3.6
–
0.8
1.4
2.7
–
–
–
(3.7)
(0.4)
(15.4)
46.6
51.7
12.7
0.7
–
–
–
–
–
–
(12.5)
6.8
(14.2)
–
–
(6.5)
Total
2013
£m
106.6
24.8
0.1
2.9
(0.1)
0.9
7.7
10.1
(2.4)
–
–
(7.1)
(14.7)
(11.0)
11.2
138
32.4
(5.5)
8.1
5.1
40.1
Total
2012
(restated)
£m
281.1
68.9
2.1
3.6
–
0.8
1.4
2.7
–
(12.5)
6.8
(17.9)
(0.4)
(15.4)
40.1
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 16. Tax (continued)
16 (b) Income tax recognised in the SOCI
Year ended 31 December
Current tax
Taken to retirement benefit obligations reserve
Deferred tax
Relating to cash flow hedges
Taken to retirement benefit obligations reserve
2013
£m
(1.1)
1.2
4.1
4.2
2012
(restated)
£m
5.9
4.1
17.1
27.1
The income tax expense for the year is based on the blended UK statutory rate of corporation tax for the period of 23.3% (2012: 24.5%). The impact of
changes in statutory tax rates relates principally to the reduction of the UK corporation tax rate from 24% to 23% from 1 April 2013, which was enacted
on 17 July 2012. In addition, the UK corporation tax rate was reduced from 23% to 21% from 1 April 2014 and from 21% to 20% from 1 April 2015, which
was enacted on 17 July 2013. These changes have resulted in a deferred tax charge arising from the reduction in the balance sheet carrying value of
deferred tax assets to reflect the anticipated rate of tax at which those assets are expected to reverse.
16 (c) Tax on items taken directly to equity
Year ended 31 December
Current tax
Recorded in share-based payment reserve
Deferred tax
Recorded in share-based payment reserve
17. Deferred tax
2013
£m
(0.1)
(5.8)
(5.9)
2012
£m
0.6
2.5
3.1
Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted tax rates.
The movement in deferred tax assets and liabilities during the year was as follows:
At 1 January – asset
Income statement charge (note 16)
Acquisitions/disposals
Items recognised in equity and in other comprehensive income (note 16)
Exchange differences
At 31 December – asset
2013
£m
(9.7)
(11.0)
–
0.5
(3.3)
(23.5)
2012
(restated)
£m
(2.9)
13.2
3.5
(23.7)
0.2
(9.7)
139
Financial statements 17. Deferred tax (continued)
The movement in deferred tax assets and liabilities during the year was as follows:
At 1 January 2013 (restated)
(Credited)/charged to income statement
Items recognised in equity and in other
comprehensive income
Exchange differences
At 31 December 2013
Temporary
differences
on assets/
intangibles
£m
Share-based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Derivative
financial
instruments
£m
Other
temporary
differences
£m
21.3
(9.9)
–
(2.8)
8.6
(21.0)
4.4
6.8
0.4
(9.4)
6.3
(1.2)
1.8
–
6.9
(13.8)
0.1
(1.2)
(0.1)
(15.0)
(2.5)
(4.4)
(6.9)
(0.8)
(14.6)
The movement in deferred tax assets and liabilities during the previous year was as follows:
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
(Credited)/charged to income statement
Acquisitions/disposals
Items recognised in equity and in other
comprehensive income
Exchange differences
At 31 December 2012 (restated)
Temporary
differences
on assets/
intangibles
£m
Share-based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Derivative
financial
instruments
£m
Other
temporary
differences
£m
25.6
0.1
25.7
(3.2)
1.0
–
(2.2)
21.3
(23.8)
1.4
(22.4)
3.6
0.1
(2.5)
0.2
(21.0)
18.5
2.0
20.5
0.7
2.0
(17.1)
0.2
6.3
(9.1)
(0.6)
(9.7)
–
–
(4.1)
–
(13.8)
(17.1)
0.1
(17.0)
12.1
0.4
–
2.0
(2.5)
Total
£m
(9.7)
(11.0)
0.5
(3.3)
(23.5)
Total
£m
(5.9)
3.0
(2.9)
13.2
3.5
(23.7)
0.2
(9.7)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities
and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the deferred tax balances (after offset) for
financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2013
£m
34.4
(57.9)
(23.5)
2012
(restated)
£m
30.4
(40.1)
(9.7)
At the balance sheet date, the Group did not recognise deferred tax assets of £9.4m (2012: £16.5m) which principally relate to unused tax losses
of £40.2m (2012: £48.4m). Losses of £14.4m (2012: £11.8m) expire within five years, losses of £1.2m (2012: £24.4m) expire within six to ten years,
losses of £7.0m (2012: £nil) expire within fifteen to twenty years, losses of £1.0m (2012: £nil) expire within twenty to twenty-five years and losses
of £16.6m (2012: £12.2m) may be carried forward indefinitely.
140
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 18. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2012 of 7.45p per share on 488.3 million ordinary shares
(2012: Final dividend for the year ended 31 December 2011 of 5.9p per share on 490.2 million ordinary shares)
Interim dividend for the year ended 31 December 2013 of 3.10p per share on 486.9 million ordinary shares
(2012: Interim dividend for the year ended 31 December 2012 of 2.65p per share on 488.2 million ordinary shares)
Proposed final dividend for the year ended 31 December 2013 of 7.45p per share on 487.4 million
ordinary shares (2012: 7.45p on 488.3 million ordinary shares)
2013
£m
36.4
15.1
51.5
36.3
2012
£m
28.9
13.0
41.9
36.4
The proposed final dividend for 2013 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these
financial statements. A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust (note 37).
19. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
Weighted average number of ordinary shares for the purpose of basic EPS
Effect of dilutive potential ordinary shares: share options
Weighted average number of ordinary shares for the purpose of diluted EPS
Earnings per share
Earnings before exceptional items
Exceptional items
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS
2013
Millions
489.0
11.6
500.6
Earnings
2012
(restated)
£m
182.8
58.2
241.0
–
241.0
2012
Millions
491.2
11.7
502.9
Per share
amount
2012
(restated)
Pence
37.09
11.85
48.94
(1.14)
47.80
Earnings
2013
£m
157.1
(61.7)
95.4
–
95.4
Per share
amount
2013
Pence
32.13
(12.62)
19.51
(0.45)
19.06
At 31 December 2013 options over nil (2012: nil) shares were excluded from the weighted average number of shares used for calculating diluted
earnings per share because their exercise price was above the average share price for the year and they were, therefore, anti-dilutive.
141
Financial statements 20. Goodwill
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
Additions
Disposals
Exchange differences
At 1 January 2013 (restated)
Disposals
Exchange differences
At 31 December 2013
£m
1,259.0
(5.1)
1,253.9
167.5
(86.8)
(22.5)
1,312.1
(15.7)
(25.6)
1,270.8
The goodwill acquired in business combinations is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to benefit from that
business combination.
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The annual impairment test
is performed immediately prior to the year end based on financial plans approved by senior management covering a five-year period. The recoverable
amount of each CGU is based on value in use calculations derived from these plans. The plans include a terminal value based on the projections for the
final year of that plan, with a growth rate assumption applied to subsequent periods. The results of the impairment test are further reviewed after
the year end in light of any significant changes in the environment.
Key assumptions
The key assumptions affecting the CGUs within each operating segment are discussed below. The table shows the key assumptions applied in the
impairment review across the CGUs. These assumptions are revised year on year in light of changes to the current economic environment.
UK & Europe
Health
Transport & Local Direct Services
Home Affairs
Germany
Global Services
Americas
AMEAA
ASPAC
Middle East
At 31 December
Discount
rate
2013
%
Discount
rate
2012
%
Terminal
growth rates
2013
%
Terminal
growth rates
2012
%
Goodwill
2013
£m
Goodwill
2012
(restated)
£m
9.1
9.1
9.1
8.6
12.5
10.5
10.4
8.6
8.4
8.4
8.4
8.0
10.5
9.5
9.5
7.3
2.2
2.2
2.2
2.0
4.0
2.4
3.0
3.0
2.5
2.5
2.5
2.2
5.0
2.7
3.0
3.5
79.5
116.9
46.0
17.6
513.3
385.9
103.3
8.3
81.2
130.9
46.0
17.1
513.5
393.2
121.8
8.4
1,270.8
1,312.1
Short-term growth rates
Short-term revenue growth rates used in each CGU five-year plan are based on internal data regarding the current pipeline of opportunities and
published industry forecasts for the relevant market. Further discussion of the Group’s order book and pipeline is provided in the Our business and
Our performance sections.
Terminal growth rates
The cash flows subsequent to the five-year period are based upon management’s estimate of the growth rates of the sectors in which the CGUs
operate. Where possible these have been derived with reference to external sources.
These rates do not exceed the average long-term growth rates forecast for the individual market sectors.
Discount rate
Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital have been used in discounting the projected cash flows.
These rates are adjusted for risks specific to the market in which the CGU operates, including but not limited to: geographic and economic risks;
contract length; and customer type.
142
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 20. Goodwill (continued)
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption and, except as noted below, the Directors have not identified any reasonably possible
change in a key assumption that would cause the carrying value of net assets, including goodwill, to exceed the recoverable amount.
Sensitivity analysis shows that a 1% increase in the discount rate would result in an impairment of the Americas CGU of £40m, the Health CGU of £3m
and the Global Services CGU of £58m. A 1% increase in the discount rate would not cause the operating assets, including goodwill, to exceed their
recoverable amount on any other CGU.
Sensitivity analysis shows that a 1% decrease in the terminal growth rate would result in an impairment of the Americas CGU of £14m, the Health CGU
of £1m and the Global Services CGU of £41m. A 1% decrease in the terminal growth rate would not cause the operating assets, including goodwill,
to exceed their recoverable amount on any other CGU.
If the short term growth rate were to equal the terminal growth rate applied to the Health CGU forecast this would result in an impairment of £20m.
21. Other intangible assets
Cost
At 1 January 2013
Eliminated on disposal
Additions from internal development
Disposals
Reclassification (to)/from property, plant and equipment
Exchange differences
At 31 December 2013
Accumulated amortisation and impairment
At 1 January 2013
Eliminated on disposal
Charge for the year – impairment (exceptional)
Charge for the year – amortisation
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2013
Net book value
At 31 December 2013
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Software, IT
and other
development
expenditure
£m
Pension
related
intangibles
£m
147.2
–
–
–
–
(10.0)
137.2
56.4
–
–
16.5
–
–
(3.3)
69.6
67.6
72.0
–
–
(71.1)
(0.4)
0.7
1.2
66.4
–
–
4.9
(71.1)
–
0.6
0.8
0.4
208.6
(1.5)
27.8
(16.7)
8.1
(5.9)
220.4
92.5
(1.0)
3.2
22.5
(15.3)
4.9
(3.1)
103.7
116.7
15.7
–
–
–
–
–
15.7
12.5
–
–
2.2
–
–
–
14.7
1.0
Total
£m
443.5
(1.5)
27.8
(87.8)
7.7
(15.2)
374.5
227.8
(1.0)
3.2
46.1
(86.4)
4.9
(5.8)
188.8
185.7
143
Financial statements 21. Other intangible assets (continued)
Cost
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
Arising on acquisition
Eliminated on disposal
Additions from internal development
Disposals
Reclassification from property, plant and equipment
Pension scheme franchise adjustment
Exchange differences
At 31 December 2012 (restated)
Accumulated amortisation
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
Arising on acquisition
Eliminated on disposal
Charge for the year
Disposals
Reclassification (to)/ from property, plant and equipment
Exchange differences
At 31 December 2012 (restated)
Net book value
At 31 December 2012 (restated)
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Software, IT
and other
development
expenditure
£m
Pension
related
intangibles
£m
116.5
–
116.5
36.8
–
–
(0.4)
–
–
(5.7)
147.2
42.1
–
42.1
–
–
16.6
(0.4)
(0.3)
(1.6)
56.4
90.8
74.2
(2.2)
72.0
–
–
0.7
–
0.9
–
(1.6)
72.0
61.8
(1.7)
60.1
–
–
7.5
–
0.5
(1.7)
66.4
170.9
(0.8)
170.1
1.1
(14.1)
49.2
(2.5)
6.4
–
(1.6)
208.6
79.1
(0.3)
78.8
0.3
(10.0)
19.4
(2.3)
6.3
–
92.5
5.6
116.1
26.2
(12.4)
13.8
–
–
–
–
–
1.9
–
15.7
19.9
(8.9)
11.0
–
–
1.5
–
–
–
12.5
3.2
Total
£m
387.8
(15.4)
372.4
37.9
(14.1)
49.9
(2.9)
7.3
1.9
(8.9)
443.5
202.9
(10.9)
192.0
0.3
(10.0)
45.0
(2.7)
6.5
(3.3)
227.8
215.7
Included in Software, IT and other development expenditure is an amount of £16.2m (2012: £9.7m) in respect of leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £67.6m (2012: £90.8m) in relation to
Customer relationships. The remaining average life of the Customer relationship intangible assets is approximately four years (2012: five years).
Amortisation of intangibles arising on acquisition consists of amortisation in relation to Customer relationships and Licences and franchises and totals
£21.4m (2012: £24.1m).
The Group is carrying £116.7m (2012: £116.1m) in relation to Software, IT and other development expenditure which includes assets relating to the
Group’s SAP related systems of £44.2m (2012: £59.4m). The average amortisation period of these assets has five years (2012: six years) remaining.
The value of internally generated intangible assets as at 31 December 2013 was approximately £64.4m (2012: £70.7m). Internally generated intangibles
relate to development costs and software.
144
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 22. Property, plant and equipment
Cost
At 1 January 2013
Additions
Reclassification from/(to) intangible assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2013
Accumulated depreciation and impairment
At 1 January 2013
Charge for the year – impairment (exceptional)
Charge for the year – depreciation and impairment
Reclassification from/(to) intangible assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2013
Net book value
At 31 December 2013
Cost
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
Additions
Reclassification from/(to) intangible assets
Disposals
Arising on acquisition
Eliminated on disposal
Exchange differences
At 31 December 2012 (restated)
Accumulated depreciation and impairment
At 1 January 2012
Changes in accounting policies
At 1 January 2012 (restated)
Charge for the year
Reclassification from/(to) intangible assets
Disposals
Arising on acquisition
Eliminated on disposal
Exchange differences
At 31 December 2012 (restated)
Net book value
At 31 December 2012 (restated)
Freehold land
and buildings
£m
Short-
leasehold
building
improvements
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
59.1
7.0
6.9
(7.9)
(0.4)
(3.3)
61.4
32.1
–
7.8
0.1
(6.2)
(0.2)
(1.7)
31.9
297.3
62.5
(15.4)
(29.4)
(1.4)
(14.6)
299.0
150.3
6.4
39.6
(5.1)
(25.9)
(0.9)
(9.4)
155.0
4.8
0.1
0.8
–
–
(0.3)
5.4
1.9
–
0.3
0.1
–
–
(0.2)
2.1
3.3
29.5
144.0
176.8
Freehold land
and buildings
£m
Short-
leasehold
building
improvements
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
7.0
–
7.0
1.2
1.5
(0.6)
–
(4.2)
(0.1)
4.8
3.7
–
3.7
0.3
0.2
(0.1)
–
(2.2)
–
1.9
2.9
59.0
(3.0)
56.0
4.9
8.3
(1.9)
1.4
(7.9)
(1.7)
59.1
27.1
(1.3)
25.8
8.6
3.4
(1.1)
1.3
(5.1)
(0.8)
32.1
27.0
339.6
(52.5)
287.1
75.1
(17.1)
(43.4)
22.4
(21.3)
(5.5)
297.3
180.0
(33.8)
146.2
37.2
(10.1)
(24.7)
16.5
(12.0)
(2.8)
150.3
Total
£m
361.2
69.6
(7.7)
(37.3)
(1.8)
(18.2)
365.8
184.3
6.4
47.7
(4.9)
(32.1)
(1.1)
(11.3)
189.0
Total
£m
405.6
(55.5)
350.1
81.2
(7.3)
(45.9)
23.8
(33.4)
(7.3)
361.2
210.8
(35.1)
175.7
46.1
(6.5)
(25.9)
17.8
(19.3)
(3.6)
184.3
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £57.0m (2012: £42.0m) in respect of
assets held under finance leases.
The carrying amount of the Group’s Short-leasehold building improvements includes an amount of £0.4m (2012: £0.5m) in respect of assets held under
finance leases.
145
147.0
176.9
Financial statements 23. Inventories
Service spares
Parts awaiting installation
Work in progress
24. Trade and other receivables
Trade and other receivables: non-current
Amounts owed by joint ventures
Loans receivable (note 29)
Security deposits
Other receivables
Trade and other receivables: current
Trade receivables
Prepayments and accrued income**
Amounts recoverable on long term contracts* (note 25)
Amounts owed by joint ventures
Loans receivable (note 29)
Security deposits
Other receivables
2013
£m
33.8
10.4
5.2
49.4
2013
£m
9.5
3.3
0.6
64.9
78.3
2013
£m
210.7
431.1
8.3
0.4
2.5
0.2
111.2
764.4
2012
(restated)
£m
33.5
12.8
6.8
53.1
2012
(restated)
£m
9.2
0.1
0.3
39.6
49.2
2012
(restated)
£m
275.0
330.7
31.2
1.4
1.1
7.8
130.9
778.1
* In respect of 2012, an amount of £7.2m has been reclassified from work in progress within inventories to trade and other receivables in relation to long-term
contract accounting.
** Also in respect of 2012, an amount of £262m has been reclassified from trade receivables to accrued income, in relation to unbilled receivables.
As at 31 December 2013, trade receivables of £2.5m (2012: £12.3m) were considered to be impaired. Impairments to trade receivables are based on
specific estimated irrecoverable amounts and provisions on outstanding balances greater than a year old unless there is firm evidence that the balance
is recoverable. The amount of the provision was £4.7m as of 31 December 2013 (2012: £5.3m) primarily because our customers either have a sovereign
credit rating being government organisations or are blue chip private sector companies.
Included within current other receivables are capitalised bid and phase in costs of £64.9m (2012: £64.9m) that are realised as a part of the normal
operating cycle of the Group.
The Group has a non recourse receivables financing facility of £60m, of which £27.1m had been utilised at 31 December 2013
(31 December 2012: £32.5m utilised).
The ageing of trade receivables is as follows:
Neither impaired nor past due
Not impaired but overdue by less than 30 days
Not impaired but overdue by between 30 and 60 days
Not impaired but overdue by more than 60 days
Impaired
Allowance for doubtful debts
146
2013
£m
125.3
48.8
20.3
18.5
2.5
(4.7)
210.7
2012
(restated)
£m
150.9
68.3
26.9
21.9
12.3
(5.3)
275.0
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 24. Trade and other receivables (continued)
Movements on the Group allowance for doubtful debts are as follows:
At 1 January
Charged/(credited) to income statement
Utilised
Exchange differences
At 31 December
2013
£m
5.3
0.4
(0.5)
(0.5)
4.7
2012
(restated)
£m
6.3
(0.8)
0.1
(0.3)
5.3
The maximum exposure to credit risk in relation to trade receivables at the reporting date is the fair value of trade receivables. The Group does not hold
any collateral as security.
25. Long-term contracts
Contracts in progress at the balance sheet date:
Amounts due from long-term project-based contract customers included in trade and other receivables
Amounts due to long-term project-based contract customers included in trade and other payables
Long-term project-based contract costs incurred plus recognised profits less recognised losses to date
Less: progress payments
2013
£m
8.3
–
8.3
239.7
(231.4)
8.3
2012
(restated)
£m
31.2
(0.9)
30.3
727.0
(696.7)
30.3
As at 31 December 2013, £nil (2012: £nil) of advances received from customers were included within long-term project-based contract balances.
As at 31 December 2013, the Group had £0.4m (2012: £1.3m) of contract retentions held by customers.
26. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2013
£m
–
28.5
28.5
Other
currencies
2013
£m
10.2
86.4
96.6
Total
2013
£m
10.2
114.9
125.1
Sterling
2012
(restated)
£m
–
33.0
33.0
Other
currencies
2012
(restated)
£m
7.5
102.3
109.8
Total
2012
(restated)
£m
7.5
135.3
142.8
* Customer advance payments totalling £10.2m (2012: £7.5m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and other
short-term highly liquid investments with a maturity of three months or less.
147
Financial statements 27. Trade and other payables
Trade and other payables: current
Trade payables
Amounts payable on long-term contracts
Other payables
Accruals and deferred income
Amounts owed to joint ventures
The average credit period taken for trade purchases is 33 days (2012 restated: 32 days).
Trade and other payables: non-current
Other payables
28. Obligations under finance leases
2013
£m
169.9
–
128.9
345.3
–
644.1
2013
£m
34.1
34.1
2012
(restated)
£m
147.9
0.9
147.1
460.0
1.4
757.3
2012
(restated)
£m
42.3
42.3
Amounts payable under finance leases:
Within one year
Between one and five years
After five years
Less: future finance charges
Present value of lease obligations
Less: amount due for settlement within one year (shown under current liabilities)
Amount due for settlement after one year
Finance lease obligations are secured by the lessors’ title to the leased assets.
Minimum
lease payments
2013
£m
Present value of
minimum lease
payments
2013
£m
Minimum
lease payments
2012
(restated)
£m
Present value of
minimum lease
payments
2012
(restated)
£m
16.9
52.6
5.0
74.5
(6.5)
68.0
(16.9)
51.1
14.9
48.3
4.8
68.0
–
68.0
(14.9)
53.1
11.8
39.2
3.3
54.3
(4.1)
50.2
(11.8)
38.4
10.7
36.3
3.2
50.2
–
50.2
(10.7)
39.5
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount.
148
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 29. Loans
Loans are repayable as follows:
On demand or within one year*
Between one and two years
Between two and five years
After five years
Less: amount due for settlement within one
year (shown within current liabilities)
Less: Amounts shown in receivables (note 24)
Amount due for settlement after one year
Non recourse
loans
2013
£m
2.9
3.0
8.4
6.0
20.3
(2.9)
–
17.4
Other
loans
2013
£m
46.8
20.7
277.0
437.7
782.2
(49.3)
5.8
738.7
Non recourse
loans
2012
(restated)
£m
Other loans
2012
(restated)
£m
Total
2012
(restated)
£m
10.0
2.4
7.3
5.4
25.1
(10.0)
–
15.1
52.9
37.8
211.9
396.9
699.5
(54.0)
1.2
646.7
62.9
40.2
219.2
402.3
724.6
(64.0)
1.2
661.8
Total
2013
£m
49.7
23.7
285.4
443.7
802.5
(52.2)
5.8
756.1
* Included in loans repayable on demand or within one year are loan receivable amounts of £2.5m (2012: £1.1m).
The carrying amounts and fair values of the loans are as follows:
Non recourse loans
Other loans
Carrying
amount
2013
£m
20.3
782.2
802.5
Fair
value
2013
£m
Carrying amount
2012
(restated)
£m
20.4
770.0
790.4
25.1
699.5
724.6
Fair value
2012
(restated)
£m
26.6
719.6
746.2
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
Analysis of net debt
Cash and cash equivalents
Non recourse loans
Other loans
Obligations under finance leases
Cash and cash equivalents
Non recourse loans
Other loans
Obligations under finance leases
At 1 January
2013
£m
142.8
(25.1)
(699.5)
(50.2)
(632.0)
At 1 January
2012
(restated)
£m
194.6
(15.5)
(819.4)
(44.9)
(685.2)
Cash flow
£m
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£m
(1.8)
4.9
(99.0)
4.9
(91.0)
–
–
–
–
–
–
–
–
–
–
(15.9)
(0.1)
16.3
0.3
0.6
–
–
–
(23.0)
(23.0)
At
31 December
2013
£m
125.1
(20.3)
(782.2)
(68.0)
(745.4)
Cash flow
£m
Acquisitions*
£m
Disposals
£m
(43.3)
(9.7)
149.0
2.4
98.4
0.8
–
(30.4)
–
(29.6)
(0.4)
–
(24.4)
6.2
(18.6)
Exchange
differences
£m
Non cash
movements
£m
At 31 December
2012
(restated)
£m
(8.9)
0.1
25.7
0.3
17.2
–
–
–
(14.2)
(14.2)
142.8
(25.1)
(699.5)
(50.2)
(632.0)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
149
Financial statements 30. Provisions
At 1 January 2012 (restated)
Arising from acquisitions
Derecognised on disposal of subsidiary
Charged to income statement
Released to income statement
Utilised during the year
Unwinding of discount
Exchange differences
At 1 January 2013 (restated)
Derecognised on disposal of subsidiary
Charged to income statement
Released to income statement
Utilised during the year
Unwinding of discount
Exchange differences
At 31 December 2013
Analysed as:
Current
Non-current
Employee
related
£m
Property
£m
Contract
£m
12.5
1.0
(0.1)
1.4
(0.4)
(0.6)
-
(0.5)
13.3
–
5.8
–
(2.7)
–
(0.7)
15.7
–
15.7
8.8
1.6
–
0.1
(0.7)
(1.7)
0.2
(0.4)
7.9
(0.3)
0.2
(0.1)
(2.5)
0.2
(0.1)
5.3
1.1
4.2
26.1
6.4
–
–
(5.7)
(11.3)
0.3
(0.9)
14.9
–
21.7
(4.6)
(5.9)
0.2
(0.4)
25.9
16.8
9.1
Other
£m
16.6
0.1
–
8.9
–
(4.7)
–
(0.8)
20.1
–
7.8
(7.4)
(6.0)
–
(0.3)
14.2
8.3
5.9
Total
£m
64.0
9.1
(0.1)
10.4
(6.8)
(18.3)
0.5
(2.6)
56.2
(0.3)
35.5
(12.1)
(17.1)
0.4
(1.5)
61.1
26.2
34.9
Employee related provisions are for long-term service awards and terminal gratuities liabilities which have been accrued and are based on contractual
entitlement, together with an estimate of the probabilities that employees will stay until retirement and receive all relevant amounts.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs associated with the lease
exceed the economic benefits expected to be received. Management has calculated the provision based on the discounted cash outflows required
to settle the lease obligations as they fall due over the next ten years.
Contract provisions relate to provisions for loss making onerous contracts. Management has used the present value of the estimated future cash
outflows required to settle the contract obligations as they fall due over the respective contracts in determining the provision.
Other provisions are held for legal and other costs that the Group expects to incur over an extended period. These costs are based on past experience
of similar items and other known factors and represent management’s best estimate of the likely outcome.
150
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 31. Capital and other commitments
Capital expenditure contracted but not provided:
– Property, plant and equipment
– Intangible assets
2013
£m
3.0
10.3
2012
(restated)
£m
1.1
7.7
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases,
which fall due as follows:
Within one year
Between one and five years
After five years
2013
£m
74.1
172.1
68.6
314.8
2012
(restated)
£m
66.8
152.5
68.5
287.8
Principal lease commitments are within the UK & Europe segment, with future minimum lease payments totalling £66.2m (2012 restated: £74.4m).
These leases relate primarily to administrative and operational buildings, track and rolling stock within the train operating companies. The length of
the leases is concurrent with the period of the franchises and the terms of the leases are fixed during this period.
32. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value of £26.0m (2012: £27.2m).
The actual commitment outstanding at 31 December 2013 was £22.6m (2012: £23.2m).
In addition to this, the Company and its subsidiaries have provided performance guarantees and indemnities relating to performance bonds and letters
of credit issued by its banks on its behalf, in the ordinary course of business. These are not expected to result in any material financial loss.
The Group is aware of certain claims in respect of employee, insurance and pension related matters with a potential value of up to £40m. However,
no provisions have been made in respect of these items as management’s assessment is that the likelihood of such claims being successful is remote.
The Group is aware of other claims and potential claims which involve or may involve legal proceedings against the Group. The Directors are of the
opinion, having regard to legal advice received and the Group’s insurance arrangements, that it is unlikely that these matters will, in aggregate,
have a material effect on the Group’s financial position.
As discussed in note 11, the EM contract was referred by the Cabinet Office to the Serious Fraud Office for investigation. At this stage, the Group has
not been informed of the outcome of this investigation.33. Financial risk management
151
Financial statements 33. Financial risk management
33 (a) Fair value of financial instruments
i) Hierarchy of fair value
The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is observable. The levels are
as follows:
Level 1: derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: derived from other observable market data for the assets or liabilities; and
Level 3: derived from valuation techniques using data that is not based on observable market data.
Based on the above, the derivative financial instruments held by the Group at 31 December 2013, are all considered to fall into Level 2. There have
been no transfers between levels in the year.
The Group held the following financial instruments which fall within the scope of IAS 39 Financial Instruments: Recognition and Measurement
at 31 December:
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised
cost
2013
Fair value –
Level 2
2013
£m
125.1
–
–
210.7
2.5
–
3.3
–
–
–
(169.9)
(52.2)
(14.9)
–
–
–
(756.1)
(53.1)
£m
–
8.6
0.1
–
–
–
–
(6.8)
(0.3)
(13.1)
–
–
–
(0.1)
(0.3)
(20.7)
–
–
Level 2
2013
£m
Amortised
cost
2012
(restated)
£m
Fair value –
Level 2
2012
(restated)
£m
125.1
142.8
–
–
–
–
210.7
2.5
275.0
1.1
–
3.3
–
–
–
–
0.1
–
–
–
(169.9)
(59.3)
(14.9)
(147.9)
(64.0)
(10.7)
–
–
–
–
–
–
(736.8)
(53.1)
(661.8)
(39.5)
–
2.7
–
–
–
0.1
–
(2.8)
–
(11.0)
–
–
–
(0.1)
(0.6)
(23.8)
–
–
Level 2
2012
(restated)
£m
142.8
–
–
275.0
1.1
–
0.1
–
–
–
(147.9)
(68.7)
(10.7)
–
–
–
(678.7)
(39.5)
Financial assets – current
Cash and bank balances
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated hedge
accounting relationships
Forward foreign exchange contracts
Loans and receivables
Trade receivables (note 24)
Loan receivables (note 24)
Financial assets – non-current
Derivative instruments in designated hedge
accounting relationships
Forward foreign exchange contracts
Loans and receivables
Loan receivables (note 24)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated hedge
accounting relationships
Cross currency swaps
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 27)
Loans (note 29)
Obligations under finance leases (note 28)
Financial liabilities – non-current
Derivatives designated as FVTPL
Interest rate swaps
Derivative instruments in designated hedge
accounting relationships
Cross currency swaps
Forward foreign exchange contracts
Financial liabilities at amortised cost
Loans (note 29)
Obligations under finance leases (note 28)
152
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements
33. Financial risk management (continued)
33 (a) Fair value of financial instruments (continued)
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair value due to the short-term
maturity of these instruments.
The fair values of loans and finance lease obligations are based on cash flows discounted using a rate based on the borrowing rate associated with
the liability.
The fair value of derivatives is calculated using a discounted cash flow approach applying discount factors derived from observable market data
to actual and estimated future cash flows. Credit risk is considered in the calculation of these fair values.
ii) Fair value of derivative financial instruments
The fair valuation of derivative financial instruments results in a net liability of £32.6m (2012: £35.5m) comprising non-current assets of £nil
(2012: £0.1m), current assets of £8.7m (2012: £2.7m), current liabilities of £20.2m (2012: £13.8m) and non-current liabilities of £21.1m (2012: £24.5m).
Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Movement in
fair value
of derivatives
designated
in hedge
accounting
relationships
£m
Movement in
fair value
of derivatives
not designated
in hedge
accounting
relationships
£m
–
1.0
–
1.0
–
1.9
–
1.9
Movement in
fair value
of derivatives
designated
in hedge
accounting
relationships
£m
Movement in
fair value
of derivatives
not designated
in hedge
accounting
relationships
£m
(1.4)
(0.3)
0.6
(1.1)
–
(3.0)
(0.1)
(3.1)
1 January
2013
£m
(0.6)
(34.8)
(0.1)
(35.5)
1 January
2012
(restated)
£m
0.8
(31.5)
(0.6)
(31.3)
31 December
2013
£m
(0.6)
(31.9)
(0.1)
(32.6)
31 December
2012
(restated)
£m
(0.6)
(34.8)
(0.1)
(35.5)
The fair value of financial liabilities at fair value through profit and loss is £6.8m (2012: £2.9m), and relates to derivatives that are not designated
in hedge accounting relationships. The fair value of the derivatives and their credit risk adjusted fair value are not materially different, and are
approximately equal to the amount contractually payable at maturity due to the short tenure of the instruments.
33 (b) Financial risk
The Board is ultimately responsible for ensuring that financial and non-financial risks are monitored and managed within acceptable and known
parameters. The Board delegates authority to the executive team to manage financial risks. The Group’s treasury function acts as a service centre
and operates within clearly defined guidelines and policies that are approved by the Board. The guidelines and policies define the financial risks to
be managed, specify the objectives in managing these risks, delegate responsibilities to those managing the risks and establish a control framework
to regulate treasury activities to minimise operational risk.
153
Financial statements 33. Financial risk management (continued)
33 (c) Liquidity risk
i) Credit facilities
The Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its ongoing operations. As at 31 December,
the Group’s committed bank credit facilities and corresponding borrowings were as follows:
Syndicated revolving credit facility
Syndicated revolving credit facility
Currency
GBP
Currency
GBP
Amount
2013
Millions
730.0
Amount
2012
Millions
730.0
Drawn
2013
£m
175.0
Drawn
2012
£m
177.6
Undrawn
2013
£m
555.0
Undrawn
2012
£m
552.4
Total facility
2013
£m
730.0
Total facility
2012
£m
730.0
The £730.0m syndicated revolving credit facility was signed in March 2012 and matures in March 2017. It is unsecured and contains financial and
non-financial covenants and obligations typical of these arrangements.
In addition to the banking facility the Group has outstanding US private placements of £574.8m, £46.4m of which will be repaid in equal instalments
over 2014 and 2015, with the remaining £528.4m as bullet repayments between 2016 and 2024.
In addition to the bank and private placement facilities the Group has drawn receivable financing facilities of £27.1m (2012: £32.5m) and total facilities
of £60m (2012: £60m).
ii) Maturity of financial liabilities
The Group’s financial liabilities will be settled on both a net and a gross basis over the remaining period between the balance sheet date and the
contractual maturity date. The amounts disclosed below are the contractual undiscounted cash flows based on the earliest date on which the Group
can be required to pay.
At 31 December 2013
Trade payables (note 27)
Obligations under finance leases (note 28)
Loans (note 29)
Future loan interest
Derivative financial liabilities
At 31 December 2012 (restated)
Trade payables (note 27)
Obligations under finance leases (note 28)
Loans (note 29)
Future loan interest
Derivative financial liabilities
On demand
or within
one year
£m
Between
one and two
years
£m
Between
two and five
years
£m
169.9
16.9
52.2
24.8
20.0
283.8
–
19.9
27.0
23.0
14.3
84.2
–
32.7
285.4
60.7
7.6
386.4
On demand
or within
one year
£m
Between
one and two
years
£m
Between
two and five
years
£m
147.9
11.8
64.0
22.5
14.6
260.8
–
12.2
40.3
19.6
9.9
82.0
–
27.0
219.3
49.1
19.0
314.4
After
five
years
£m
–
5.0
443.7
59.8
–
508.5
After
five
years
£m
–
3.3
402.2
54.6
–
460.1
Total
£m
169.9
74.5
808.3
168.3
41.9
1,262.9
Total
£m
147.9
54.3
725.8
145.8
43.5
1,117.3
154
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements
33. Financial risk management (continued)
33 (c) Liquidity risk (continued)
The Group’s derivative financial liabilities are settled on both a net and gross basis depending upon the terms of each derivative financial instrument.
The maturity of the Group’s undiscounted derivative financial liabilities is as follows:
At 31 December 2013
On demand or within one year
Between one and two years
Between two and five years
At 31 December 2012
On demand or within one year
Between one and two years
Between two and five years
33 (d) Foreign exchange risk
Cross
currency
swaps
£m
(0.2)
(0.4)
–
(0.6)
Cross
currency
swaps
£m
–
–
(0.7)
(0.7)
Forward
foreign
exchange
contracts
£m
(19.7)
(13.9)
(7.6)
(41.2)
Forward
foreign
exchange
contracts
£m
(14.6)
(9.8)
(18.3)
(42.7)
Interest
rate
swaps
£m
(0.1)
–
–
(0.1)
Interest
rate
swaps
£m
–
(0.1)
–
(0.1)
Total
£m
(20.0)
(14.3)
(7.6)
(41.9)
Total
£m
(14.6)
(9.9)
(19.0)
(43.5)
i) Transactional
It is the Group’s policy to hedge material transactional exposures using forward foreign exchange contracts to fix the functional currency value of
non-functional currency cash flows. At 31 December 2013, there were no material unhedged non-functional currency monetary assets or liabilities,
firm commitments or highly probable forecast transactions.
ii) Translational
Where possible the Group will raise external funding to match the currency profile of its foreign operations in order to mitigate translation exposure.
If matched funding is not possible, currency derivatives may be used to protect against movements in foreign exchange.
iii) Hedge accounting
For the purposes of hedge accounting, hedges are classified as either fair value hedges, cash flow hedges or hedges of net investments in foreign
operations. Pages 122 to 123 detail the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39.
At 31 December 2013, the Group held two cross currency swaps designated as cash flow hedges against the 2003 US Dollar private placement.
Fixed interest cash flows denominated in US Dollars are exchanged for fixed interest cash flows denominated in Sterling. The profile of these cross
currency swaps held by the Group is as follows:
Maturity
August 2015
2013
Receivable
USD
interest rate
%
Payable
GBP interest
rate
%
5.7
5.7
Notional
amount
USD m
22.0
2012
Receivable
USD
interest rate
%
Payable
GBP interest
rate
%
5.7
5.7
Notional
amount
USD m
33.0
The Group also held a number of forward foreign exchange contracts designated as cash flow hedges. The net notional amounts are summarised
by currency below:
Sterling
US Dollar
Euro
Indian Rupee
2013
£m
(99.7)
4.9
4.5
93.5
2012
£m
(176.3)
(47.2)
9.5
190.7
All currency derivatives designated as cash flow hedges are highly effective and as at 31 December 2013 a net fair value loss of £33.2m (2012: £29.7m
loss) has been deferred in hedging reserve. During the course of the year to 31 December 2013, £14.5m (2012: £13.8m) of fair value losses were
transferred to the hedging reserve, and £9.7m (2012: £9.7m) reclassified to the consolidated income statement.
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2013 that result in net currency gains and losses in the income statement
and equity arise principally from movement in US Dollar and Indian Rupee exchange rates. At 31 December 2013, if both had weakened by 10%
against Sterling, with all other variables held constant, post-tax profit for the year would have increased by £0.6m (2012: £0.6m increase), comprising
USD £0.2m and INR £0.4m and equity would have decreased by £13.1m (2012: £9.1m increase), comprising USD £0.9m and INR £12.2m.
155
Financial statements
33. Financial risk management (continued)
33 (e) Interest rate risk
The Group’s policy is to minimise the impact of interest rate volatility on earnings to provide an appropriate level of certainty to cost of funds.
Exposure to interest rate risk arises principally on changes to US Dollar and Sterling interest rates.
i) Interest rate management
An analysis of financial assets and liabilities exposed to interest rate risk is set out below:
Financial assets
Cash and cash equivalents
Other loan receivables
Financial liabilities
Non recourse Canadian Dollar loans
Non recourse Sterling loans
Sterling loans
US Dollar loans
AU Dollar loans
Other loans
Floating
rate
2013
£m
125.1
1.1
126.2
Floating
rate
2013
£m
–
–
200.1
1.5
–
11.6
213.2
Weighted
average fixed
interest rate
2013
%
–
3.30
Weighted
average fixed
interest rate
2013
%
–
3.62
2.30
4.09
–
–
Fixed rate
2013
£m
–
4.7
4.7
Fixed rate
2013
£m
–
20.3
33.2
541.6
–
–
595.1
Floating
rate
2012
£m
142.8
1.2
144.0
Floating
rate
2012
£m
–
–
97.2
26.5
79.4
36.8
239.9
Weighted
average fixed
interest rate
2012
%
–
–
Weighted
average fixed
interest rate
2012
%
5.27
3.64
3.23
4.16
4.49
4.38
Fixed rate
2012
£m
–
–
–
Fixed rate
2012
£m
7.5
17.6
49.8
411.0
–
–
485.9
Exposure to interest rate fluctuations is mitigated through the issuance of fixed rate debt and the use of interest rate derivatives. Excluded from the
above analysis is £68.0m (2012: £50.2m) of amounts payable under finance leases, which are subject to fixed rates of interest.
ii) Interest rate swaps
Interest rate swaps outstanding at 31 December 2013 relate to interest rate risk management on debt held locally within the Group.
Maturity
March 2014
January 2015
Maturity
March 2014
January 2015
Notional
Value
2013
USD m
0.5
2.5
Notional
Value
2012
USD m
2.1
3.8
Payable USD
interest rate
2013
%
Receivable USD
interest rate
2013
%
Receivable JPY
interest rate
2013
%
6.89
6.30
–
3 month USD LIBOR + 2.0
3 month JPY LIBOR + 1.0
–
Payable USD
interest rate
2012
%
Receivable USD
interest rate
2012
%
Receivable JPY
interest rate
2012
%
6.89
6.30
–
3 month USD LIBOR + 2.0
3 month JPY LIBOR + 1.0
–
The interest rate swaps were not designated as cash flow hedges. The fair value loss of £0.1m has therefore been recorded in the income statement
(2012: £0.1m loss).
iii) Interest rate sensitivity
The effect of a 100 basis point increase in LIBOR rates on the net financial liability position at the balance sheet date, with all other variables held
constant, would have resulted in a reduction in post-tax profit for the year to 31 December 2013 of £0.7m (2012: £0.7m).
156
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 33. Financial risk management (continued)
33 (f) Credit risk
The Group’s principal financial assets are cash and cash equivalents and trade and other receivables.
Credit risk is the risk that a counterparty could default on its contractual obligations. In this regard, the Group’s principle exposure is to cash and cash
equivalents, derivative transactions and trade receivables.
The Group’s trade receivables credit risk is relatively low given that a high proportion of our customer base are government bodies with strong
sovereign, or sovereign like, credit ratings. However, where the assessed credit worthiness of a customer, government or non government, falls
below that considered acceptable, appropriate measures are taken to mitigate against the risk of contractual default using instruments such as
credit guarantees.
The Group’s Treasury function only transacts with counterparties that comply with Board policy. The credit risk is measured by way of a counterparty
credit rating and as a minimum any counterparty must have a long term public rating of ‘Single A’ from any two recognised rating agencies.
Pre-approved limits are set based on a rating matrix and exposures monitored accordingly. The Group also employs the use of set-off rights in
some agreements.
33 (g) Capital risk
The Group defines capital as equity, loans and borrowings and cash and cash equivalents. The Articles of Association of Serco Group plc require
that the net borrowings of Serco Group plc and its subsidiary undertakings shall not at any time without the previous sanction of an ordinary resolution
exceed three and a half times adjusted capital and reserves. The Group does not have any externally imposed requirements for managing capital,
other than those imposed by its debt covenants and Company Law.
The Board’s objective is to maintain a capital structure that supports the Group’s strategic objectives, including but not limited to reshaping the portfolio
through mergers, acquisitions and disposals. In doing so the Board seeks to manage funding and liquidity risk, optimise shareholder return and
maintain an implied investment grade credit position. This strategy is unchanged from the prior year.
The Board reviews and approves at least annually a treasury policy document which covers, inter alia, funding and liquidity risk, capital structure and
risk management. This policy details targets for committed funding headroom, diversification of committed funding and debt maturity profile. All targets
were met throughout the financial year.
The Group ensures that sufficient funds and distributable reserves are held to allow payments of projected dividends to shareholders and it intends
to pursue a policy of dividend growth that broadly reflects the increase in underlying earnings of the business.
The following table summarises the capital of the Group:
Cash and cash equivalents
Loans
Obligations under finance leases
Equity
Capital
2013
£m
(125.1)
802.5
68.0
1,095.9
1,841.3
2012
£m
(142.8)
724.6
50.2
1,128.9
1,760.9
157
Financial statements 34. Retirement benefit schemes
The Group has accounted for pensions in accordance with IAS 19 Employee Benefits. The Group operates a number of defined benefit schemes and
defined contribution schemes. The pension charge for the year ended 31 December 2013 excluding joint ventures, was £108.6m (2012: £85.5m).
34 (a) Defined benefit schemes
The Group operates defined benefit schemes for qualifying employees of its subsidiaries in UK and Europe.
The assets of the funded schemes are held independently of the Group’s assets in separate trustee administered funds. The trustees of the pension
fund are required by law to act in the interest of the fund and of all relevant stakeholders in the scheme. The Trustees of the pension fund are
responsible for the investment policy with regard to the assets of the fund. The Group’s major schemes are valued by independent actuaries annually
using the projected unit credit actuarial cost method. This reflects service rendered by employees to the dates of valuation and incorporates actuarial
assumptions primarily regarding discount rates used in determining the present value of benefits, projected rates of salary growth, and long-term
expected rates of return for scheme assets. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned.
Long-term expected rates of return for scheme assets are based on published brokers’ forecasts for each category of scheme assets. Pension assets
and liabilities in different defined benefit schemes are not offset unless the Group has a legally enforceable right to use the surplus in one scheme to
settle obligations in the other scheme and intends to exercise this right.
The schemes in the UK typically expose the Company to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
●●● Investment risk
The present value of the defined benefit schemes’ liability is calculated using a discount rate determined by reference to high quality corporate bond
yields; if the return on plan assets is below this rate, a deficit will be created.
●●● Interest risk
A decrease in the bond interest rate will increase the scheme liability but this will be partially offset by an increase in the return of the plan’s debt
investments.
●●● Longevity risk
The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during
and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.
●●● Salary risk
The present value of the defined benefit scheme liability is calculated by reference to the future salaries of plan participants, as such, an increase
in the salary of the plan participants will increase the plan’s liability.
i) Balance sheet values
The amounts recognised in the balance sheet are grouped together as follows:
Contract specific
These are pre-funded defined benefit schemes. The Group has obligations to contribute variable amounts to the pension schemes over the terms of
the related contracts. At rebid, any deficit or surplus would transfer to the next contractor. The Group has recognised as a liability the defined benefit
obligation less the fair value of scheme assets that it will fund over the period of the contracts with a corresponding amount recognised as intangible
assets at the start of the contracts. Subsequent actuarial gains and losses in relation to the Group’s share of the pension obligations have been
recognised in the SOCI. The intangible assets are amortised over the term of the contracts.
Non contract specific
These consist of a pre-funded defined benefit scheme which does not relate to any specific contract (the funding policy is to contribute such variable
amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis) and an unfunded defined benefit scheme, both of
which do not relate to any specific contract. Any liabilities arising are recognised in full.
ii) Triennial funding valuation
Among our non contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The estimated actuarial deficit of
SPLAS as at 31 December 2013 was approximately £13.0m (2012: £10.9m). The most recent full actuarial valuation of this scheme was undertaken
as at 5 April 2012 and resulted in an actuarially assessed deficit of £24m. Following this review, the Group agreed with the Trustees to make a small
increase in contributions, bringing cash contributions of up to 33% of members’ pensionable salaries until 2021. The level of benefits and contributions
under the scheme is kept under continual review in light of the needs of the business and changes to pension legislation.
158
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 34. Retirement benefit schemes (continued)
34 (a) Defined benefit schemes (continued)
The assets and liabilities of the schemes at 31 December are:
Contract
specific
2013
£m
Non contract
specific
2013
£m
Scheme assets at fair value
Equities
Bonds except LDI
Liability driven investments (LDI)
Gilts
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Members’ share of deficit
Franchise adjustment*
Analysed as:
Net pension liability
Net pension asset
Related assets
Intangible assets (note 21)
93.4
40.6
13.6
42.5
9.1
25.9
2.1
227.2
(267.8)
(40.6)
–
35.1
(5.5)
(5.5)
–
1.0
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Contract
specific
2012
(restated)
£m
Non contract
specific
2012
(restated)
£m
Scheme assets at fair value
Equities
Bonds except LDI
Liability driven investments (LDI)
Gilts
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Members’ share of deficit
Franchise adjustment*
Effect of IFRIC 14
Analysed as:
Net pension liability
Net pension asset
Related assets
Intangible assets (note 21)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Total
2013
£m
129.4
54.3
1,062.5
42.5
9.1
50.9
24.4
36.0
13.7
1,048.9
–
–
25.0
22.3
1,145.9
(1,091.2)
1,373.1
(1,359.0)
54.7
3.7
–
58.4
(5.8)
64.2
14.1
3.7
35.1
52.9
(11.3)
64.2
–
1.0
Total
2012
(restated)
£m
142.1
62.8
998.5
44.6
7.9
75.7
22.5
58.9
11.9
982.6
20.9
0.4
58.6
22.5
1,155.8
(1,115.3)
1,354.1
(1,395.7)
40.5
4.1
–
0.9
45.5
(24.2)
69.7
(41.6)
4.1
68.3
0.9
31.7
(38.0)
69.7
83.2
50.9
15.9
23.7
7.5
17.1
–
198.3
(280.4)
(82.1)
–
68.3
–
(13.8)
(13.8)
–
3.2
–
3.2
159
Financial statements 34. Retirement benefit schemes (continued)
34 (a) Defined benefit schemes (continued)
Liabilities in relation to unfunded schemes included above amount to £0.3m (2012: £0.2m).
Certain of the Group’s non contract specific schemes have a Liability Driven Investment (LDI) strategy which aims to reduce volatility risk by better
matching assets to liabilities. The main asset classes that make up the LDI investments are gilts and corporate bonds with inflation and interest
swap overlays. The assumed expected rate of return is taken to be gilts +0.8% (2012: gilts +0.8%).
Virtually all equity and debt instruments have quoted prices in active markets. Annuity policies and property assets can be classified as
Level 3 instruments.
In some schemes, employee contributions vary over time to meet a specified proportion of the overall costs, including a proportion of any deficit.
The liabilities recognised in the balance sheet for these schemes are net of the proportion attributed to employees. In addition, the amounts charged
to the income statement for these schemes are net of the proportion attributed to employees. The amounts attributed to employees are shown
separately in the reconciliation of changes in the fair value of scheme assets and liabilities.
The amounts recognised in the financial statements for the year are analysed as follows:
Contract
specific
2013
£m
Non contract
specific
2013
£m
9.3
–
–
–
0.9
10.2
(9.2)
(2.4)
11.9
0.3
20.0
(9.2)
10.8
8.8
12.5
8.8
40.9
–
(35.6)
–
(35.6)
5.3
10.8
–
(2.4)
(0.1)
3.2
11.5
(48.0)
–
45.4
(2.6)
22.0
(48.8)
(26.8)
(9.2)
(9.1)
34.5
(10.6)
(0.9)
–
(0.6)
(1.5)
(12.1)
Total
2013
£m
20.1
–
(2.4)
(0.1)
4.1
21.7
(57.2)
(2.4)
57.3
(2.3)
42.0
(58.0)
(16.0)
(0.4)
3.4
43.3
30.3
(0.9)
(35.6)
(0.6)
(37.1)
(6.8)
Recognised in the income statement
Current service cost – employer
Past service cost
Curtailment gain
Settlement gain
Administrative expenses and taxes
Recognised in arriving at operating profit
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements recognised in the SOCI
Change in IFRIC 14
Change in franchise adjustment
Change in members’ share
Actuarial gains on reimbursable rights
Total pension cost recognised in the SOCI
160
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 34. Retirement benefit schemes (continued)
34 (a) Defined benefit schemes (continued)
Recognised in the income statement
Current service cost – employer
Past service cost
Curtailment gain
Administrative expenses and taxes
Recognised in arriving at operating profit
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Interest on effect of asset ceiling
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements recognised in the SOCI
Change in IFRIC 14
Change in franchise adjustment
Change in members’ share
Actuarial gains on reimbursable rights
Total pension cost recognised in the SOCI
Changes in the fair value of scheme liabilities are analysed as follows:
At 1 January 2012 (restated)
Current service cost – employer
Current service cost – employee
Past service costs
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Plan curtailments
Arising on acquisition of a subsidiary
Eliminated on disposal of a subsidiary
Exchange differences
At 31 December 2012 (restated)
At 1 January 2013
Current service cost – employer
Current service cost – employee
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Plan curtailments
Plan settlements
At 31 December 2013
Contract
specific
2012
(restated)
£m
Non contract
specific
2012
(restated)
£m
Total
2012
(restated)
£m
7.3
–
–
0.7
8.0
(7.9)
(2.1)
10.3
–
0.3
14.3
(8.0)
6.3
(2.2)
(31.5)
3.6
(23.8)
–
23.8
–
23.8
–
11.9
1.1
(6.1)
1.3
8.2
(50.3)
–
46.0
0.1
(4.2)
39.3
(51.4)
(12.1)
–
(96.0)
14.9
(93.2)
8.4
–
2.1
10.5
(82.7)
Contract
specific
£m
Non contract
specific
£m
209.1
7.3
–
–
0.8
10.3
–
(3.8)
2.2
31.5
(3.6)
–
26.6
–
–
280.4
280.4
9.3
–
0.7
11.9
–
(4.4)
(8.8)
(12.5)
(8.8)
–
–
267.8
1,001.3
11.9
0.2
1.1
0.6
46.0
0.9
(38.4)
–
96.0
(14.9)
(6.1)
69.9
(51.6)
(1.6)
1,115.3
1,115.3
10.8
0.2
0.8
45.4
1.0
(37.8)
9.2
9.1
(34.5)
(2.4)
(25.9)
1,091.2
19.2
1.1
(6.1)
2.0
16.2
(58.2)
(2.1)
56.3
0.1
(3.9)
53.6
(59.4)
(5.8)
(2.2)
(127.5)
18.5
(117.0)
8.4
23.8
2.1
34.3
(82.7)
Total
£m
1,210.4
19.2
0.2
1.1
1.4
56.3
0.9
(42.2)
2.2
127.5
(18.5)
(6.1)
96.5
(51.6)
(1.6)
1,395.7
1,395.7
20.1
0.2
1.5
57.3
1.0
(42.2)
0.4
(3.4)
(43.3)
(2.4)
(25.9)
1,359.0
161
Financial statements 34. Retirement benefit schemes (continued)
34 (a) Defined benefit schemes (continued)
Changes in the fair value of scheme assets are analysed as follows:
At 1 January 2012 (restated)
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
Arising on acquisition of a subsidiary
Eliminated on disposal of a subsidiary
At 31 December 2012 (restated)
At 1 January 2013
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
Plan settlements
At 31 December 2013
Contract
specific
£m
Non contract
specific
£m
152.8
7.9
0.1
(0.7)
13.6
0.6
(3.8)
6.3
21.5
–
198.3
198.3
9.2
–
(0.9)
13.4
0.8
(4.4)
10.8
–
227.2
1,065.3
50.3
1.1
(1.3)
29.8
0.6
(38.4)
(12.1)
61.6
(1.1)
1,155.8
1,155.8
48.0
0.8
(3.2)
34.0
0.9
(37.8)
(26.8)
(25.8)
1,145.9
Total
£m
1,218.1
58.2
1.2
(2.0)
43.4
1.2
(42.2)
(5.8)
83.1
(1.1)
1,354.1
1,354.1
57.2
0.8
(4.1)
47.4
1.7
(42.2)
(16.0)
(25.8)
1,373.1
Employer contributions for non contract specific schemes in 2013 include a £19.7m (2012: £nil) special contribution. The special pension contributions
of £19.7m relate to a £16.8m payment to fund the deficit on the Vertex pension fund prior to its transfer into the Group’s largest defined benefit scheme,
Serco Pension and Life Assurance Scheme (SPLAS), and £2.9m in relation to deficit recovery funding of the Walsall defined benefit pension scheme.
The Vertex payment enables their separate defined benefit scheme to be closed and thereby reduces ongoing administration costs.
The normal contributions expected to be paid during the financial year ending 31 December 2014 are £27.3m (financial year ended
31 December 2013: £32.3m).
The average duration of the benefit obligation at the end of the reporting period is 17.8 years (2012: 17.5 years).
Assumptions in respect of the expected return on scheme assets are based on market expectations of returns over the life of the related obligation.
Due consideration has been given to current market conditions as at 31 December 2013 in respect to inflation, interest, bond yields and equity
performance when selecting the expected return on assets assumptions.
The expected yield on bond investments with fixed interest rates is derived from their market value. The yield on equity investments contains
an additional premium (an ‘equity risk premium’) to compensate investors for the additional anticipated risks of holding this type of investment,
when compared to bond yields. Management have concluded that an appropriate equity risk premium is 4.6% (2012: 4.6%).
162
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 34. Retirement benefit schemes (continued)
34 (a) Defined benefit schemes (continued)
The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset categories held by scheme.
Main assumptions:
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption
Discount rate
Post-retirement mortality:
Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female
2013
%
2012
%
3.20
2.50 (CPI) and 3.30 (RPI)
2.60 (CPI) and 3.40 (RPI)
2.60 (CPI) and 3.40 (RPI)
4.60
3.40
2.20 (CPI) and 3.00 (RPI)
2.20 (CPI) and 3.00 (RPI)
2.20 (CPI) and 3.00 (RPI)
4.30
2013
Years
22.5
24.9
24.2
26.9
2012
Years
21.0
23.5
22.5
24.6
Management considers the significant actuarial assumptions with regards to the determination of the defined benefit obligation to be the discount rate,
inflation, the rate of salary increases and mortality.
Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the reporting period, assuming
all other assumptions are held constant.
The sensitivities have been derived in the same manner as the defined benefit obligation as at 31 December 2013 where the defined benefit obligation
is estimated using the Projected Unit Credit method. Under this method each participant’s benefits are attributed to years of service, taking into
consideration future salary increases and the scheme’s benefit allocation formula. Thus, the estimated total pension to which each participant is
expected to become entitled at retirement is broken down into units, each associated with a year of past or future credited service.
The defined benefit obligation as at 31 December 2013 is calculated on the actuarial assumptions agreed as at that date. The sensitivities are calculated
by changing each assumption in turn following the methodology above with all other things held constant. The change in the defined benefit obligation
from updating the single assumption represents the impact of that assumption on the calculation of the defined benefit obligation.
Discount rate
Inflation
Rate of salary increase
Mortality
Assumption Change in assumption
Change in
present value of
scheme liabilities
4.6%
2.4% (CPI)
3.4% (RPI)
3.2%
+0.5%
(0.5%)
+0.5%
(0.5%)
+0.5%
(0.5%)
20.7 – 27.8*
Increase by one year
(9%)
+10%
+9%
(8%)
+1%
(1%)
+2%
* Post retirement mortality range for male and female, current and future pensioners.
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent limitation given that it is
more likely for a combination of changes, but highlights the value of each individual risk and is therefore suitable basis for providing this analysis.
34 (b) Defined contribution schemes
The Group paid employer contributions of £86.9m (2012: £69.3m) into UK and other defined contribution schemes and foreign state pension schemes.
Pre-funded defined benefit schemes treated as defined contribution
Serco accounts for certain pre-funded defined benefit schemes relating to contracts as defined contribution schemes because the contributions are
fixed until the end of the current concession and at rebid any surplus or deficit would transfer to the next contractor. Cash contributions are recognised
as pension costs and no asset or liability is shown on the balance sheet.
163
Financial statements 35. Share capital
Issued and fully paid:
498,462,508 (2012: 497,327,070) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
499,328,896 (2012: 498,462,508) ordinary shares of 2p each at 31 December
The Company has one class of ordinary shares which carry no right to fixed income.
2013
£m
10.0
–
10.0
Number
2013
Millions
498.5
0.8
499.3
2012
£m
9.9
0.1
10.0
Number
2012
Millions
497.3
1.2
498.5
During the year 866,388 (2012: 1,135,438) ordinary shares of 2p each were allotted to the holders of share-based awards or their personal
representatives using newly listed shares.
36. Share premium account
At 1 January
Premium on shares issued
At 31 December
37. Reserves
2013
£m
326.5
1.3
327.8
2012
£m
322.7
3.8
326.5
37 (a) Retirement benefit obligations reserve
The retirement benefit obligations reserve represents the actuarial gains and losses recognised in respect of annual actuarial valuations for defined
benefit retirement schemes, the fair value adjustments on reimbursable rights and the related movements in deferred tax balances.
37 (b) Share-based payment reserve
The share-based payment reserve represents credits relating to equity settled share-based payment transactions and any gain or loss on the exercise
of share options satisfied by own shares.
37 (c) Own shares reserve
The own shares reserve represents the cost of shares in Serco Group plc purchased in the market and held by the Serco Group plc Employee
Share Ownership Trust (ESOT) to satisfy options under the Group’s share options schemes. At 31 December 2013, the ESOT held 11,883,973
(2012: 10,174,594) shares equal to 2.4% of the current allotted share capital (2012: 2.0%). The market value of shares held by the ESOT as
at 31 December 2013 was £59.3m (2012: £54.4m).
37 (d) Hedging and translation reserve
The hedging and translation reserve represents foreign exchange differences arising on translation of the Group’s overseas operations and movements
relating to cash flow hedges.
38. Share-based payment expense
The Group recognised the following expenses related to equity settled share-based payment transactions:
2013
£m
0.1
–
1.5
(0.9)
2.2
2.9
2012
£m
0.8
0.1
9.9
1.1
0.2
12.1
Long Term Incentive Scheme and Plan
Transformational Share Scheme
Performance Share Plan
Deferred Bonus Plan
Sharesave 2012
164
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 38. Share-based payment expense (continued)
Executive Option Plan (EOP)
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a financial performance
target over three years. The options are granted at market value and awards made to eligible employees are based on between 50% and 100% of salary
as at 31 December prior to grant. If the options remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore,
options may be forfeited if the eligible employee leaves the Group before the options vest.
Details of the movement in all EOP options are as follows:
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
Weighted
average
exercise price
2013
£
2,472
–
(797)
(206)
1,469
2.56
–
1.58
1.53
3.24
Number of
options
2012
Thousands
3,389
–
(759)
(158)
2,472
Weighted
average
exercise price
2012
£
2.49
–
2.29
2.22
2.56
Of these options 1,468,534 (2012: 2,471,696) were exercisable at the end of the year, with a weighted average exercise price of £3.24 (2012: £2.56).
The options outstanding at 31 December 2013 had a weighted average contractual life of 2.0 years (2012: 2.0 years).
The exercise prices for options outstanding at 31 December 2013 ranged from £2.17 to £4.55 (2012: £1.39 to £4.55).
The weighted average share price at the date of exercise approximates to the weighted average share price during the year, which was £5.73
(2012: £5.50).
The fair value of options granted under the EOP is measured by use of the Binomial Lattice model. The Binomial Lattice model is considered to be
most appropriate for valuing options granted under this scheme as it allows exercise over a longer period of time between the vesting date and the
expiry date.
There were no new options granted under Executive Option Plans during the year.
Long Term Incentive Scheme (LTIS) and Long Term Incentive Plan (LTIP)
Awards made to eligible employees under the above schemes are structured as options with a zero exercise price. The extent to which an award vests
(and therefore becomes exercisable) is measured by reference to the growth in the Group’s earnings per share (EPS) or total shareholder return (TSR)
over the performance period or service period conditions.
If the options remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore, options may be forfeited if the
eligible employee leaves the Group before the options vest. Details of the movement in all LTIS and LTIP options are as follows:
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
Weighted
average
exercise price
2013
£
917
62
(332)
(159)
488
Nil
Nil
Nil
Nil
Nil
Number of
options
2012
Thousands
2,638
218
(247)
(1,692)
917
Weighted
average
exercise price
2012
£
Nil
Nil
Nil
Nil
Nil
Of these options, 425,953 (2012: 521,459) were exercisable at the end of the year. The options outstanding at 31 December 2013 had a weighted
average contractual life of 2.38 years (2012: 3.92 years).
There was one grant of LTIP options during the year. The fair value is considered to be their face value less the present value of any dividend payments
not paid over the vesting period. The weighted average fair value of options granted under this scheme in the year is £6.22.
165
Financial statements 38. Share-based payment expense (continued)
Transformational Share Scheme
Awards made to eligible employees under the Transformational Share Scheme are structured as options with a £nil exercise price and are exercisable
after the third anniversary of the grant.
The employee must exercise the options no later than 30 days after the vesting date. Furthermore, if the eligible employee leaves the Group before
the options vest, the options may be forfeited.
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
Weighted
average
exercise price
2013
£
Number of
options
2012
Thousands
Weighted
average
exercise price
2012
£
33
–
(26)
(7)
–
Nil
Nil
Nil
Nil
Nil
86
–
(53)
–
33
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2012: none). The options outstanding at 31 December 2013 had a weighted average
contractual life of 0 years (2012: 0.2 years).
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options with an exercise price of two pence. Awards vest after the performance period of three
years and are subject to the achievement of two performance measures. The primary performance measure is TSR and the second performance
measure is based on EPS growth.
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
10,084
4,399
(535)
(3,477)
10,471
Weighted
average
exercise price
2013
£
0.02
0.02
0.02
0.02
0.02
Number of
options
2012
Thousands
7,426
4,104
(125)
(1,321)
10,084
Weighted
average
exercise price
2012
£
0.02
0.02
0.02
0.02
0.02
Of these options 292,203 (2012: 148,830) were exercisable at the end of the year.
The options outstanding at 31 December 2013 had a weighted average contractual life of 8.37 years (2012: 8.45 years).
In the year, four grants were made with 50% of the options granted subject to TSR performance conditions and 50% subject to EPS growth
performance conditions.
The options subject to TSR performance conditions were valued using the Monte Carlo Simulation model. The options subject to EPS growth
performance conditions were deemed to have fair values equal to their face value less the present value of any dividend payments not received over
the vesting period.
The Monte Carlo Simulation model is considered to be the most appropriate for valuing options granted under schemes where there are changes
in performance conditions by which the options are measured, such as for the TSR based awards.
The inputs into the Monte Carlo Simulation model for options granted during the year with TSR performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2013
618p
2p
22.5%
3 years
0.2%
2012
540p
2p
22.7%
3 years
0.3%
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected
life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions,
and behavioural considerations.
166
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 38. Share-based payment expense (continued)
The assumptions for options granted during the year with EPS growth performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2013
618p
2p
N/A
3 years
N/A
2012
540p
2p
N/A
3 years
N/A
The weighted average fair value of options granted under this scheme in the year is £4.83.
Deferred Bonus Plan (DBP)
Under the DBP, eligible employees are entitled to use up to 50% of their earned annual bonus to purchase shares in the Group at market price.
Provided they remain in employment for this period, the shares are retained for that period and the two performance measures (which are the same
as the PSP scheme, being TSR and EPS growth) have been met, the Group will make a matching share award. For shares purchased by employees
in 2011, the match was on a basis of two times the gross bonus deferred.
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
Weighted
average
exercise price
2013
£
1,058
390
(91)
(532)
825
Nil
Nil
Nil
Nil
Nil
Number of
options
2012
Thousands
750
519
(107)
(104)
1,058
Weighted
average
exercise price
2012
£
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2012: none). The options outstanding at 31 December 2013 had a weighted average
contractual life of 1.2 years (2012: 1.6 years).
In the year, one grant was made with 100% of the deferred bonus subject to EPS growth performance conditions.
The portion subject to EPS growth performance conditions was deemed to have a fair value equal to their face value less the present value of any
dividend payments not received over the vesting period.
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years. The expected
life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and
behavioural considerations.
The assumptions for options granted during the year with EPS growth performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
The weighted average fair value of options granted under this scheme in the year is £6.23.
2013
623p
Nil
N/A
3 years
N/A
2012
515p
Nil
N/A
3 years
N/A
167
Financial statements 38. Share-based payment expense (continued)
Sharesave 2012
The Sharesave 2012 scheme provides for a purchase price equal to the daily average market price on the date of grant less 10%. The options can
be exercised for a period of six months following their vesting. Details of the movement in Sharesave 2012 options are as follows:
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2013
Thousands
Weighted
average
exercise price
2013
£
6,012
–
(23)
(857)
5,132
5.14
5.14
5.14
5.14
5.14
Number of
options
2012
Thousands
–
6,074
–
(62)
6,012
Weighted
average
exercise price
2012
£
–
5.14
5.14
5.14
5.14
Of these options, none (2012: none) were exercisable at the end of the year. The options outstanding at 31 December 2013 had a weighted average
contractual life of 2.4 years (2012: 3.4 years). Given that options granted under the Sharesave plan can be exercised at any time after vesting,
management consider the Binomial Lattice model to be appropriate to value the options granted under this scheme. The Binomial Lattice model allows
exercise over a window in time, from vesting date to expiry date and assumes option holders make economically rational exercise decisions.
39. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note. Transactions between the Group and its joint venture undertakings are disclosed below.
Trading transactions
During the year, Group companies entered into the following material transactions with joint ventures:
Royalties and management fees receivable
Dividends receivable
The following receivable balances were held relating to joint ventures:
Current:
Loans and other receivables
Non-current:
Loans and other receivables
2013
£m
2.1
51.5
53.6
2013
£m
0.4
2013
£m
9.5
2012
£m
2.3
80.6
82.9
2012
(restated)
£m
1.4
2012
(restated)
£m
9.2
Joint venture receivables and loan amounts outstanding have arisen from transactions undertaken during the general course of trading, are unsecured,
and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with an appropriate margin. No guarantee has been given
or received. No provisions are required for doubtful debts in respect of the amounts owed by the joint ventures.
168
Serco Group plc | Annual report and accounts 2013Financial statements Notes to the Consolidated Financial Statements 39. Related party transactions (continued)
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors’
liability insurance.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related
Party Disclosures:
Short-term employee benefits
Post-employment benefits
Share-based payment (credit)/charge
2013
£m
10.9
0.1
(0.7)
10.3
2012
£m
9.4
0.4
1.8
11.6
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee
(2013: 16 individuals, 2012: 17 individuals).
40. Notes to the consolidated cash flow statement
Reconciliation of operating profit to net cash inflow from operating activities
Year ended 31 December
Operating profit for the year
Adjustments for:
Share of profits in joint ventures
Share-based payment expense
Exceptional impairment of intangible assets and property, plant and equipment
Depreciation and impairment of property, plant and equipment – other
Amortisation of intangible assets
Exceptional profit on disposal of subsidiaries and operations
Loss on disposal of intangible assets
Profit on disposal of property, plant and equipment
Increase/(decrease) in provisions
Release of deferred consideration in relation to prior year acquisition – exceptional
Other non-cash movements
Operating cash inflow before movements in working capital
Decrease/(increase) in inventories
Increase in receivables
(Decrease)/increase in payables
Cash generated by operations
Tax paid
Net cash inflow from operating activities
Additions to fixtures and equipment during the year amounting to £23.1m (2012: £14.4m) were financed by new finance leases.
2013
£m
143.8
(47.1)
2.9
9.6
47.7
46.1
(19.2)
1.0
–
7.4
(10.3)
(6.2)
175.7
7.2
(66.0)
(90.2)
26.7
(18.8)
7.9
2012
(restated)
£m
272.2
(62.5)
12.1
–
46.1
45.0
(5.6)
–
(0.9)
(19.4)
–
(2.8)
284.2
(2.2)
(61.1)
33.6
254.5
(33.6)
220.9
169
Financial statements Company Balance Sheet
At 31 December
Fixed assets
Investments in subsidiaries
Current assets
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Deferred tax
Derivative financial instruments due within one year
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Borrowings
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Borrowings
Amounts owed to subsidiary companies
Derivative financial instruments
Total liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Own shares reserve
Share-based payment reserve
Hedging and translation reserve
Profit and loss account
Total shareholders’ funds
Note
42
43
43
47
46
44
45
46
45
46
48
49
50
51
52
53
2013
£m
815.5
815.5
17.3
1,174.0
2.9
2.9
0.7
1,197.8
2,013.3
(142.0)
(99.7)
(6.6)
(248.3)
949.5
(726.5)
(352.0)
(0.3)
(1,078.8)
(1,327.1)
686.2
10.0
327.8
0.1
(70.5)
55.3
(0.2)
363.7
686.2
2012
£m
811.8
811.8
6.0
1,222.1
5.9
0.7
5.6
1,240.3
2,052.1
(249.4)
(106.2)
(2.6)
(358.2)
882.1
(615.0)
(385.3)
(0.6)
(1,000.9)
(1,359.1)
693.0
10.0
326.5
0.1
(58.8)
57.7
1.9
355.6
693.0
The financial statements (registered number 02048608) were approved by the Board of Directors on 3 March 2014 and signed on its behalf by:
Ed Casey
Acting Group Chief Executive
Andrew Jenner
Group Chief Financial Officer
170
Serco Group plc | Annual report and accounts 2013Financial statements
Notes to the Company Financial Statements
41. Accounting policies
The principal accounting policies adopted are set out below and have been applied consistently throughout the current and preceding year.
Basis of accounting
The Company meets the definition of a qualifying entity under FRS 100 (Financial Reporting Standard 100) issued by the Financial Reporting Council.
The financial statements have therefore been prepared in accordance with FRS 101 (Financial Reporting Standard 101) ‘Reduced Disclosure
Framework’ as issued by the Financial Reporting Council.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share-based
payments, financial instruments, capital management, presentation of comparative information in respect of certain assets, presentation of a cash
flow statement, standards not yet effective, impairment of assets and related party transactions.
The financial statements have been prepared on the historical cost basis and on the going concern basis, except for the revaluation of certain financial
instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the goods and services. The principal
accounting policies adopted are the same as those set out in note 2 to the consolidated financial statements, except as noted below.
Fixed asset investments
Investments held as fixed assets are stated at cost less provision for any impairment in value.
42. Investments held as fixed assets
Shares in subsidiary companies at cost:
At 1 January 2012
Options over parent’s shares awarded to employees of subsidiaries
Disposals
At 1 January 2013
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2013
£m
816.6
7.2
(12.0)
811.8
3.7
815.5
Full details of the principal subsidiaries of Serco Group plc can be found in note 6 to the Group’s consolidated financial statements. The Company
directly owns 100% of the ordinary share capital of the following subsidiary.
Name
Serco Holdings Limited
43. Debtors
Amounts due within one year
Corporation tax recoverable
Other debtors
Amounts due after more than one year
Amounts owed by subsidiary companies
Amounts owed by joint ventures
Other debtors
% ownership
100%
2012
£m
3.6
2.4
6.0
1,212.1
4.1
5.9
1,222.1
1,228.1
2013
£m
13.8
3.5
17.3
1,165.4
4.0
4.6
1,174.0
1,191.3
171
Financial statements Notes to the Company Financial Statements
44. Trade and other payables
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
45. Borrowings
Loans:
Less: amounts included in creditors falling due within one year – loans
Less: amounts included in creditors falling due within one year – bank loans & overdrafts
Amounts falling due after more than one year
Loans:
Within one year or on demand
Between one and two years
Between two and five years
After five years
46. Derivative financial instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non-current
Current
2013
£m
128.1
0.2
10.7
3.0
142.0
2013
£m
826.2
(23.2)
(76.5)
726.5
99.7
23.2
265.6
437.7
826.2
2012
£m
231.5
0.3
15.7
1.9
249.4
2012
£m
721.2
(27.0)
(79.2)
615.0
106.2
23.4
54.2
537.4
721.2
Assets
2013
£m
Liabilities
2013
£m
Assets
2012
£m
Liabilities
2012
£m
–
2.9
2.9
–
2.9
2.9
(0.6)
(6.3)
(6.9)
(0.3)
(6.6)
(6.9)
–
0.7
0.7
–
0.7
0.7
(0.6)
(2.6)
(3.2)
(0.6)
(2.6)
(3.2)
The Company holds derivative financial instruments in accordance with the Group’s policy in relation to its financial risk management. Details of the
disclosures are set out in note 33 of the Group’s consolidated financial statements.
47. Deferred tax asset
Capital allowances in excess of depreciation
Short-term timing differences
The movement in the deferred tax asset during the year was as follows:
At 1 January
(Credited)/charged to profit and loss account
Items taken directly to equity
At 31 December
172
2013
£m
0.2
2.7
2.9
2013
£m
5.9
(1.8)
(1.2)
2.9
2012
£m
0.1
5.8
5.9
2012
£m
4.9
0.8
0.2
5.9
Serco Group plc | Annual report and accounts 2013Financial statements 48. Called up share capital
Issued and fully paid:
498,462,508 (2012: 497,327,070) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
499,328,896 (2012: 498,462,508) ordinary shares of 2p each at 31 December
The Company has one class of ordinary shares which carry no right to fixed income.
2013
£m
10.0
–
10.0
Number
2013
Millions
498.5
0.8
499.3
2012
£m
9.9
0.1
10.0
Number
2012
Millions
497.3
1.2
498.5
During the year 866,388 (2012: 1,135,438) ordinary shares of 2p each were allotted to the holders of share-based awards or their personal
representatives using newly listed shares.
49. Share premium account
At 1 January
Premium on shares issued
At 31 December
50. Own shares
2013
£m
326.5
1.3
327.8
2012
£m
322.7
3.8
326.5
The own shares reserve represents the cost of shares in Serco Group plc purchased in the market and held by the Serco Group plc Employee
Share Ownership Trust (ESOT) to satisfy options under the Group’s share options schemes. At 31 December 2013, the ESOT held 11,883,973
(2012: 10,174,594) shares equal to 2.4% of the current allotted share capital (2012: 2.0%). The market value of shares held by the ESOT as at
31 December 2013 was £59.3m (2012: £54.4m).
51. Share-based payment reserve
At 1 January
Options over parent’s shares awarded to employees of subsidiaries
Share-based payment (credit)/expense
Share options to holders on exercise
Tax (credit)/charge on items taken directly to equity
At 31 December
Details of the share-based payment disclosures are set out in note 38 of the Group’s consolidated financial statements.
52. Hedging and translation reserve
At 1 January
Fair value loss on cash flow hedges during the period
Net exchange loss on translation of foreign operations
At 31 December
2013
£m
57.7
3.7
(0.8)
(4.5)
(0.8)
55.3
2013
£m
1.9
(1.0)
(1.1)
(0.2)
2012
£m
49.1
7.2
4.8
(3.6)
0.2
57.7
2012
£m
1.9
–
–
1.9
173
Financial statements Notes to the Company Financial Statements
53. Profit and loss account
At 1 January
Profit for the year
Equity dividends
At 31 December
2013
£m
355.6
59.6
(51.5)
363.7
2012
£m
288.9
108.6
(41.9)
355.6
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of these accounts.
54. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value of £26.0m (2012: £27.2m).
The actual commitment outstanding at 31 December 2013 was £22.6m (2012: £23.2m).
The Company has provided certain financial guarantees and indemnities in respect of the loans, overdraft and bonding facilities, and other financial
commitments of its subsidiaries. The total commitment outstanding as at 31 December 2013 was £145.0m (2012: £151.0m).
In addition to this, the Company and its subsidiaries have provided performance guarantees and indemnities relating to performance bonds and letters
of credit issued by its banks on its behalf, in the ordinary course of business. These are not expected to result in any material financial loss.
The Group is aware of claims and potential claims which involve or may involve legal proceedings against the Group. The Directors are of the opinion,
having regard to legal advice received and the Group’s insurance arrangements, that it is unlikely that these matters will, in aggregate, have a material
effect on the Group’s financial position.
55. Related parties
The Directors of Serco Group plc had no material transactions with the Company or its subsidiaries during the year other than service contracts and
Directors’ liability insurance. Details of the Directors’ remuneration are disclosed in the Remuneration Report for the Group.
The Company is exempt under the terms of FRS 101 from disclosing related party transactions with entities that are 100% owned by Serco Group plc.
Supplementary information
Five-year record (unaudited)
Adjusted revenue
Revenue*
Adjusted operating profit*
Adjusted operating margin*
Adjusted profit before tax*
Group free cash flow
Group recourse net debt
Adjusted net debt
Adjusted earnings per share*
Dividend per share
* Restated for IFRS 11 and IAS 19R where appropriate.
£m
£m
£m
%
£m
£m
£m
£m
p
p
2013
5,144
4,288
292.0
5.68%
254.4
84.8
(725.1)
(701.2)
39.53
10.55
2012
(restated)
2011
(restated)
2010
(restated)
2009
(restated)
4,913
4,060
314.1
6.39%
271.6
181.2
(606.9)
(580.7)
41.55
10.10
4,646
3,827
289.0
6.22%
252.6
168.3
(669.8)
(633.9)
38.14
8.40
4,327
3,533
257.6
5.95%
226.3
185.8
(303.6)
(261.2)
33.96
7.35
3,970
3,184
228.7
5.76%
200.5
137.3
(387.7)
(358.5)
30.39
6.25
174
Serco Group plc | Annual report and accounts 2013Financial statements Directors, Secretary and Advisors
Additional information
Stockbrokers
J.P. Morgan Cazenove
125 London Wall
London
EC2Y 5AJ
Bank of America Merrill Lynch
2 King Edward Street
London
EC1A 1HQ
Principal Bankers
HSBC Bank PLC
8 Canada Square
London
E14 5HQ
Solicitors
Clifford Chance LLP
10 Upper Bank Street
London
E14 5JJ
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Chairman
Alastair Lyons CBE
Directors
Malcolm Wyman*^
Edward J Casey Jr
Andrew Jenner
Ralph D Crosby Jr*
Angie Risley*
Rachel Lomax*
Mike Clasper*
Tamara Ingram*
Secretary
John Hickey
* Non-Executive Director
^ Senior Independent Director
Registered Office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
Serco Group plc is registered in
England and Wales, No. 2048608
Auditors
Deloitte LLP
2 New Street Square
London
EC4A 3BZ
Investment Bankers
UBS Limited
1 Finsbury Avenue
London
EC2M 2PP
175
Shareholder information
Group website
Go to www.serco.com to catch up on the current share price, latest news
in the investors section and read the Annual report and accounts.
Registrars
Administrative enquiries about the holding of Serco Group plc shares
and enquiries in relation to the Serco Dividend Re-investment Plan (DRIP)
should be directed to:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0871 384 2932
There is a text phone available on 0871 384 2255 for shareholders with
hearing difficulties.
Calls cost 8p per minute plus network extras.
Callers from outside the UK should use +44 (0) 121 415 7047.
Telephone lines are open 8.30am to 5.30pm Monday to Friday.
Dividend re-investment plan
You can elect to receive future dividends as shares rather than cash
by participating in the DRIP. To register, request further information,
or to obtain a copy of terms and conditions booklet and mandate form
please contact Equiniti on 0871 384 2932. Alternatively, these can be
downloaded from the website www.shareview.co.uk by choosing the
Dividend Investment Plan heading within the Product Centre section.
Dividends paid direct to your bank account
●●● Avoid the risk of cheques being lost in the post
●●● No need to present cheques for payment
●●● Dividend credited to your account on payment date
To set up a dividend mandate or change your existing mandated details
please register with the Shareholder Centre via the Shareview website
or contact Equiniti on the number provided above.
Global payment services
For overseas shareholders in certain countries, Equiniti offers an
Overseas Payment Service by arrangement with Citibank Europe
PLC. This service offers shareholders the ability to have their dividend
converted into their local currency and sent electronically to their local
bank account. To sign up for this service, please contact Equiniti on
0871 384 2932 (+ 44 (0) 121 415 7047 if calling from outside the UK).
Alternatively you can download an application form and terms and
conditions from the website www.shareview.co.uk.
Electronic communication
You can register for electronic communications by visiting www.shareview.
co.uk; you will need your shareholder reference number to sign up.
After you have registered you will receive emails alerting you to
communications as they become available.
Share dealing
Serco does not endorse any one service for the buying and selling
of its shares. However, arrangements have been made with the
following independent share dealing provider to offer all shareholders
competitive charges.
Alternatively, if shareholders hold a share certificate they can also use
any bank, building society or stockbroker offering share dealing facilities.
Shareholders in any doubt about buying or selling their shares should
seek professional financial advice.
Stocktrade
We have arranged a telephone sharedealing service with Stocktrade
for purchases/sales of Serco Group plc shares. You should call
+44 (0)131 240 0414 between 8.00am and 4.30pm, Monday to Friday
and quote Low Co 330. Commission is charged at 0.5% on amounts
to £10,000 and 0.2% on the excess thereafter, subject to a minimum
charge of £17.50. Further details and other dealing options can be
found at www.stocktrade.co.uk/serco. This service is not available
to US residents.
Please note that UK share purchases will be subject to 0.5% stamp duty.
Shareholder profile
The range and size of ordinary shareholding as at 31 December 2013
is set out below:
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 – 500,000
500,001 – 1,000,000
1,000,001 – 10,000,000
10,000,001 and above
Number of
shareholders
4,428
2,626
415
484
162
48
60
11
%
53.48
32.09
5.00
5.95
1.99
0.60
0.75
0.14
Number of
shares
1,754,387
5,567,119
2,782,599
15,413,813
40,586,900
34,748,478
161,184,275
237,291,325
%
0.35
1.11
0.56
3.09
8.13
6.96
32.28
47.52
Total
8,234
100
499,328,896
100
176
Serco Group plc | Annual report and accounts 2013Additional information Additional information
Financial calendar
2013 Full Year Results Announcement
Ex-dividend date for 2013 final dividend
Record date for 2013 final dividend
Deadline for DRIP mandates
AGM and Interim Management Statement
Payment date for 2013 final dividend
Pre-close statement
2014 Half Year Results announcement
Ex-dividend date for 2013 interim dividend
Record date for 2014 interim dividend
Deadline for DRIP mandates
Payment date for 2014 interim dividend
Interim Management Statement
Pre-close statement
* Provisional and/or subject to shareholder approval
4 March 2014
12 March 2014
14 March 2014
22 April 2014
08 May 2014
14 May 2014
27 June 2014
*12 August 2014
*3 September 2014
*5 September 2014
*26 September 2014
*17 October 2014
*18 November 2014
*19 December 2014
Printed on Cocoon Silk 50 which is certified
as an FSC® product manufactured with 50%
recycled fibres and 50% virgin fibres.
Designed and produced by FTI Consulting www.fticonsulting.com
Printed in England by Pureprint Group www.pureprint.com
177
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Serco Group plc
Registered Office:
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire RG27 9UY
T: +44 (0)1256 745 900
E: generalenquiries@serco.com
www.serco.com